Rising inflation is driving institutional investors away from traditional asset classes, study finds

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High levels of global inflation and fears of recession are forcing institutional investors to drastically shift their portfolios away from stocks and bonds, according to new research from Clearwater Analytics.

The study, which covered more than 130 institutional investment firms representing more than $9 trillion in assets under management, found that only 17% of asset managers favored stocks in the current climate, compared to 38 % in a similar survey conducted six months ago.

CPI data released earlier this week showed UK inflation levels were at their highest level in over 40 years, hitting 10.1% in June. Many asset managers reported losses in the first half of the year, while more than half of survey respondents said they avoided incurring losses for P&L purposes, and 48% expressed concern about the fact that the UK could be heading into a prolonged recession.

Interest in floating rate securities has fallen from 50% to around 20%, reflecting the drastic impact of inflation (currently at its highest level in over 40 years in the UK) on investment strategies. investment, while around a third of investment firms said income risk reduction was focused on duration.

In contrast, money markets and real assets appear to be proving more attractive in the current climate, with 38% and 30% of respondents citing them, respectively.

The research also suggested a growing need for institutional investors to be able to easily see exposures across sectors and risk metrics amid high market volatility – with two-thirds stressing the importance of this.

However, more than a third believe their investment technology platforms lag behind industry standards, underscoring the importance of technology investment as a means of competitive advantage.

“The power-pinching movement of weak growth and rising inflation paints the bleakest of the bleakest picture. But while earnings are reduced for investors, both in terms of return on investment and across their businesses overall given inflation, there is still an underlying sense of optimism,” said Gayatri Raman, President of Europe and Asia at Clearwater Analytics.

“More than 40% of companies believe that the slowdown in global markets offers many opportunities. The key to realizing these opportunities is having a more accurate understanding of exactly how portfolios are assigned to help manage expectations. Being able to project cash flow and earnings provides insights that can help investors weather the likely recession and make more informed long-term decisions.

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