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Institutional investors are wary of war, inflation, recession and stagflation as they look ahead to 2023. Yet despite the risks to portfolios, they’re “remarkably optimistic” about most asset classes, a report from Natixis Investment Managers says.

An annual survey of 500 institutional investors in 30 countries found investors are most bullish on private equity (63%) and bonds (56%), as higher rates contribute to a “resurgence” of traditional fixed income.

“But where private markets featured prominently in yield replacement strategies while rates were at all-time lows, institutions may also be counting on private equity to make up for lackluster equity returns,” the report said.

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Within alternative investments, more than four in 10 said they plan to increase their allocation to infrastructure (44%) and private equity/venture capital (43%), and another one in three favoured private debt (36%).

“The argument for increased alternative allocations in 2023 goes well beyond the quest for yield as institutional teams look to mitigate risk,” the report said.

Almost half of respondents said private markets could provide a safe haven in a recession. However, almost three in four (72%) said they’ve increased due diligence due to concerns about deal quality, and about one in three (36%) are using specialty consultants for guidance on private markets.

Within fixed income, roughly half of investors said they’re increasing allocations to investment grade and government bonds, with only about one in three adding to high yield (37%) and emerging market bonds (29%). Almost two-thirds said they planned to counter duration risk with a combination of short-term bonds and ETFs.

However, with central banks ending asset-purchase programs, 36% of investors cited concerns about bond market liquidity.

As for public equities, more than half of respondents said they were bullish on stocks despite this year’s double-digit losses and ongoing volatility.

“With so much downside having been priced in over the course of 2022, it’s likely investors are looking ahead to recovery since the bulk of the damage has already been done,” the report said.

Four in 10 institutional investors said they’re increasing their U.S. equities allocation compared to roughly one in three for Europe (27%) and Asia Pacific/Australia (31%).

A majority of respondents projected large caps to fare better than small in another volatile year, and about half said dispersion within equity performance would increase.

Investors picked energy, health care and financials as the sectors most likely to outperform in 2023. On the energy side, almost half said supply issues have led them to increase investment in renewables.

The survey found investors bearish on real estate as the pandemic continues to affect the asset class. Commercial properties are still negotiating changing work habits, and the residential sector faces high rates and declining prices after a run-up the past two years.

As for crypto, most investors don’t see the S&P bitcoin index’s 62% year-to-date drop as a buying opportunity. More than four in five expect crypto to underperform again in 2023.

The result of this relatively sanguine outlook is that most investors aren’t planning major portfolio changes. On average, the survey showed institutional allocations won’t shift more than 1% in any given asset class.

The average portfolio for 2023 has 34% in equities, 37% in fixed income, 18% in alternatives, 5% in cash, 4% in liability-driven investments and 1% in cash.

On the economic side, most investors don’t see inflation rising in 2023 but a majority think it will remain stubbornly high and that a recession is necessary to bring inflation under control. More than two-thirds (69%) said inflation was the top portfolio risk in the year ahead, but almost as many (65%) think stagflation is a greater risk than a recession.

War was the greatest economic threat for 2023, cited by 57% of respondents, displacing supply chain disruptions at the top.

The survey was conducted by CoreData Research in October and November 2022 for Natixis.