What are the expectations for the institutional investment market in 2021?

Technology and digital transformation could become a distinctive element for many investment management firms in 2021.

What are the expectations for the institutional investment market in 2021?

Even though we were all eager to send off 2020, no one really expected that when the clock struck midnight on December 31st, all 2020 problems will be gone. However, COVID-19 vaccine development’s announcement brought some general optimism, and the financial market was not an exception.

Fund managers expect strong investment market recovery in 2021

Bank of America’s December Global Fund Manager Survey undertaken with 190 fund managers overseeing a total of $534 billion in assets shows that, although 2020 was dominated by the global recession caused by COVID-19, recovery expectations surpass previous recessions in terms of speed and magnitude.

Fund managers tend to be very optimistic about the global economy trends in 2021: 70% of surveyed managers expect improvement as early as the first half of 2021.  This optimistic attitude is mainly due to the rollout of COVID-19 vaccinations.

Further on, a net 89% of fund managers surveyed anticipate stronger growth in 2021, while a record 87% expect higher long-term yields.

Will we see the investment market return to normal in 2021?

Morgan Stanley’s strategists are positive in their 2021 Investor Strategy Outlook. 2021 could bring sustainable and synchronous global recovery, supported by policy, and following the ‘normal’ post-recession playbook.  A cornerstone of this outlook, which includes positive adjustments to several economic estimates, rests on sustaining the V-shaped recovery that began in May 2020, leading to 6.4% global GDP growth in 2021 and price appreciation for a wide range of asset classes.

Further on, 25% to 30% earnings growth is expected across major equities markets and significant declines in corporate leverage—key factors in their call to overweight equities and credit vs government bonds and cash, along with positioning for U.S. dollar weakness.

In the context of sectors with the highest expected growth, technology is on the top of the list, as 72% of institutional investors expect tech companies to grow continuously. Together with information technology and healthcare, those sectors are expected to be the big winners of the 2021 market. On the other hand, energy, real estate, consumer discretionary and financials might be the underperformers.

Many institutional investors remain cautious

Investors are more cautious in assessing the global market’s recovery in 2021, testifies Natixis’s survey. Out of 500 surveyed institutional investors who collectively manage more than $13.5 trillion in assets for pensions, insurers, sovereign wealth funds, foundations, and endowments worldwide, only 21% expect full economic recovery before 2022.

Broad asset class allocations will remain relatively unchanged in institutional portfolios, with 36% in stocks, 40% in bonds, 17% alternatives and 6% in cash. However, institutional investors are taking advantage of what they expect will be increased dispersion in the markets, making many tactical adjustments within asset classes.

The main expectations and plans for 2021 include:

  • Defensive strategies will outperform a more aggressive approach in 2021
  • Broad equity diversification and value overgrowth
  • Increase exposure to European, emerging market and the Asia Pacific stocks
  • Decrease exposure to government bonds and add investment-grade corporate debt and securitized loans
  • Broaden alternative strategies to include greater use of private equity and infrastructure investments

How can investment management firms transform in order to thrive?

In Deloitte’s 2021 investment management outlook survey, the investment management industry sustained less COVID-19 damage than other sectors of the economy. Revenues for investment management firms remained largely intact, but the people, the operations, and the technology used by investment managers were impacted. The market correction was short-lived, but the subsequent recovery activities undertaken continue today at many firms.

Industry prospects will likely revolve around how the industry makes fundamental financial and operational decisions to balance organizational growth and stability with employee safety and productivity. Furthermore, another important factor is how efficiently organizations invest in technologies and train their workforces to utilize them. In a nutshell, over the next 18 months, the future of investment management firms could depend on how they execute on their plans related to the return to the workplace, managing finances, and controlling operational change.

Technology and digital transformation represent an important area for expense management. Overall, investment management firms are changing approaches to digital transformation to support cost savings.

Digital transformation could become a distinctive element for many investment management firms. According to Deloitte’s outlook, investors may judge firms based on the sophistication of their digital customer interactions and the quality of how they meet customer demands. Many will likely assume that technological prowess in customer interactions translates to prowess in the investment management process.

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