A combination of increased volatility and ongoing political and economic uncertainty is pushing financial institutions in Europe and Asia toward bonds. Asset allocators at several hundred of these firms expect to significantly increase their allocation to the asset class.
This is one of the key findings from a PGIM survey of 210 gatekeepers at financial institutions managing at least 1 billion euro in assets. 15 percent of respondents were based in the Benelux region.
More than half of the fund selectors plan to increase their fixed income allocation over the next 12 months. Net of those intending to reduce their exposure, 39 percent say they plan to invest more in bonds. In addition, 43 percent expect bonds to generate higher returns over the coming year than they did in the past year.
“In a market defined by policy uncertainty and turbulence, clients are turning to fixed income for both steady income and essential downside protection,” said Matt Shafer of PGIM, responding to the results. According to the head of international
intermediary distribution, there is strong demand for multisector strategies that can quickly shift between different bond categories based on relative value.
Within fixed income, investment grade bonds are the top choice (54 percent), followed by government bonds (47 percent), green bonds (40 percent), and high yield (39 percent). Distressed debt and syndicated loans are the least popular.
Risks
The risk most investors (77 percent) are bracing for in the next 12 months is increased volatility in global equity markets. A slightly smaller share (72 percent) expects political risks to rise.
Concerns about a default crisis in private credit or a broad revaluation of private equity are less widespread. Respectively, 48 and 44 percent believe the likelihood of such events will increase over the coming year.
Still, both private asset classes remain relatively attractive. On balance, 19 percent of fund selectors plan to invest more in private credit, and 18 percent in private equity. Notably, Shafer added, fund selectors show a clear preference for direct investments and co-investments, suggesting a growing desire for greater control in the current environment. Pooled vehicles are the second choice.
Thematic
Yvo van der Pol, head of Benelux & Nordics, said the survey results clearly reflect the tension asset allocators are currently dealing with. “Gatekeepers recognize the need to manage heightened risks, but they are not retreating—they are adapting to what is likely to be a prolonged period of uncertainty.”
Investors are not pulling risk off the table. On balance, 26 percent of fund selectors still plan to increase their equity allocation in the year ahead. Global equities are the top pick, followed by thematic stocks, Asian equities, and U.S. equities. Within thematic investing, respondents see the most opportunity in artificial intelligence, followed by ESG, cybersecurity, and data centers.