Institutional investors are heading into the new year with the expectation that 2024’s positive market conditions will continue, while keeping an eye on a wide range of economic threats, according to a new survey by Natixis Investment Managers (Natixis IM).

A wide range of economic threats loom on the horizon, with US/China tensions driving the most concerns (34 percent) followed by the expansions of current wars (32 percent), underlying economic concerns including global recession (29 percent) and China’s economy (23 percent).

In the U.S., institutional investors’ fears are focused more on the expansion of current wars (33 percent), persistent inflation (30 percent) and valuations (30 percent) than US/China relations (26 percent).

The survey of 500 institutional investors in October 2024 who collectively manage $28.3 trillion in assets for public and private pensions, insurers, foundations, endowments and sovereign wealth funds worldwide, included 86 institutional investors in the US responsible for managing $5 trillion in assets.

A majority of U.S.-based investors (73 percent) believe a recession is unlikely in 2025 . One year ago, 62 percent of U.S. institutional investors believed a recession was inevitable in 2024.

The shift in recession beliefs is largely due to the Federal Reserve’s progress in navigating a soft landing – 71 percent of U.S. investors believe the economy will reach a soft landing (defined as a slow growth state) in 2025, while 73 percent think we’re already in a soft-landing scenario.

The survey found that most U.S. investors (73 percent) anticipate between one and three rate cuts in 2025, with 55 percent indicating inflation targets will be achieved in 2025.

“Subsiding recession fears in 2024 have given way to enthusiasm for strong returns on the horizon, but investors are still looking over their shoulder at the geopolitical and economic risks,” says Dave Goodsell, executive director of the Natixis Center for Investor Insight. “While the U.S. election gives some clarity to institutional investors of the direction that economic and foreign policy could go, there is still a lot of ‘wait and see’ as investors calibrate their portfolios to account for the opportunities the market has to offer versus the risks it could see in 2025.”

Geopolitical Risks: Diverging Focuses for U.S. and Global Investors

Institutional investors worldwide are concerned about the geopolitical landscape heading into 2025, but the risks that concern them most vary depending on the region.

In the U.S., institutions are worried about the expansion of current wars in Ukraine and Gaza (33 percent), while the rest of the world – including the UK (42 percent), France (38 percent), Germany (53 percent) and Singapore (53 percent) – list U.S./China relations as their top macroeconomic threat.

Institutional investors in the U.S. express pessimism around reaching a resolution to the current geopolitical conflicts, the survey showed.

In the Ukraine war, 78 percent of U.S. institutional investors believe it will grind on through 2025, while only 22 percent think it will end with a peace dividend.

Around 60 percent of U.S investors believe the Gaza war will spread across the region, while 40 percent believe a settlement will be reached.

Both U.S. institutional investors (74 percent) and institutional investors across the globe (66 percent) believe the growing alliance between Russia, North Korea and Iran will lead to greater economic instability.

While 61 percent of global institutional investors express concern about a trade war, that number drops slightly to 58 percent of U.S. institutional investors.

China’s economic and regulatory environment has become less attractive for U.S. institutional investors with:

• 91 percent indicating regulatory uncertainties in China make the country a less attractive investment opportunity.
• 87 percent indicating a “conscious decoupling” from China presents an opportunity for new emerging markets to climb the global ladder.
• 79 percent saying China’s geopolitical ambitions diminish its investing appeal, with 65 percent indicating tensions in the South China Sea will become a more immediate threat to markets.

Beyond the immediate market implications of geopolitical conflict, U.S. institutional investors see additional risks.

Almost two-thirds (64 percent) of U.S. investors believe geopolitical tensions will ratchet up disputes over new frontiers, such as space or the Arctic.

In technology, 69 percent of U.S. institutions believe that artificial intelligence (AI) will open a new avenue of geopolitical risks to investors.

Economic and Sector Outlook Reflects Investors’ Measured Confidence in Markets

Despite geopolitical concerns, the positive economic backdrop – lowering inflation, anticipated rate cuts, etc. – drives U.S .institutions’ optimism about markets in 2025. U.S. investors continue to express bullishness across equity and bond markets.

Going into 2025, the survey found U.S. investors to be 59 percent bullish on stocks, with 73 percent of U.S. institutional investors projecting 1-3 rate cuts on the horizon, and 40 percent saying the rate cuts will accelerate equity market upside.

Nearly half (47 percent) of U.S. institutional investors believe outperformance will be less concentrated and expect growth and outperformance from multiple sectors, including financials (48 percent) and energy (48 performance) healthcare (44 percent) and information technology (42 percent).

Only 19 percent of U.S. institutional investors believe consumer discretionary will outperform.

U.S. investors are divided on whether large caps (49 percent) or small caps (51 percent) will outperform in 2025. Forty percent say lower rates will enhance the performance of small caps.

Regarding bond markets, 59 percent of U.S. respondents had a positive outlook compared to 62 percent of global institutional investors.

While global investors expressed concerns about defaults, 73 percent of those surveyed in the U.S. believe the main bond headline in 2025 will be that corporate defaults remain low.

U.S. institutional investors expect to remain vigilant in their duration management and credit monitoring, with 72 percent saying active management is essential in fixed income investing.

Valuations a Top Concern for Portfolio Allocations

After an extended run-up, valuations are a top portfolio concern, especially in the U.S., where almost two-thirds (63 percent) of U.S. institutional investors say they are one of their top portfolio risks in 2025.

One in four (40 percent) of U.S. investors see inflation as a top risk, and while 2024 markets provided a relatively smooth ride in key asset classes, U.S. institutions project an uptick for volatility in stocks (57 percent), currencies (44 percent) and bonds (40 percent).

U.S. institutions are looking for long-term performance, so little change is expected in their allocation projections for 2025 and the long term, the survey found.

Strategy remains focused on meeting an average long-term return assumption of 8.3 percent. In addition, key pressure has been alleviated by higher interest rates and U.S. institutional liability ratios have settled at 86 percent.

U.S. institutional investors are approaching their portfolios by taking more risk ad staying active.

The number of institutions who said they are actively derisking their portfolios dropped to (51 percent) compared to 58 percent in 2024. Over a third (34 percent) are actively taking on more risks.

After a year in which three quarters (76 percent) of U.S. institutional investors said their actively managed investments outperformed their benchmarks in 2024, 60 percent of U.S. institutional investors believe that active investing will again outperform passive investing in 2025.

Investors Bullish on Private Markets But Opportunities Are Hard to Find

Alternative assets remain of particular interest, especially private markets, with U.S. investors 60 percent bullish on private equity and (59 percent) bullish on private debt. In fact, 65 percent of investors believe that a portfolio with 60 percent stocks, 20 percent bonds and 20 percent alternatives will outperform the traditional 60:40 portfolio.

With rate cuts expected in 2025, 80 percent of U.S. institutional investors are anticipating that they will improve deal flow in private markets, with 74 percent believing that more private debt will be issued in 2025 to meet demand.

Over half (56 percent) of U.S. institutional investors also find that the popularity of private markets is making it hard to find investment opportunities.

Another 67 percent say that growing investment in private assets is increasing risks in institutional portfolios, resulting in 70 percent of U.S. institutional investors confirming they have increased their due diligence on private assets has increased as they are concerned about deal quality.

On AI and technology, 71 percent of U.S. institutional investors believe that using AI as an investment tool will unlock new investment opportunities that were otherwise undetectable.

Three-quarters (76 percent) of investors believe U.S. policy will foster AI growth at home to compete with China, though U.S. investors are a little more split on what AI’s market story will be in 2025: 59 percent believe the AI story for 2025 will be that it supercharges tech growth, but 41 percent see the story as the AI bubble bursts.

A full copy of the report on the Natixis Investment Managers Institutional Investor 2025 Market Outlook can be found at: https://www.im.natixis.com/en-us/insights/investor-sentiment/2024/institutional-outlook