This publication is drawing together predictions from wealth management firms about 2020 and beyond, exploring views about equity, bond, private equity, real estate and other markets. We will continue to set out views on unfolding themes in the coming days.

2020 Market Outlook: Natixis Investment Managers
The group finds investors are staying sober as markets rally on.

Institutional investors are apprehensive about market prospects for 2020, in spite of record highs in major market indexes around the world, according to a global survey of institutional investors released last week by Natixis Investment Managers. Increased volatility is cited as the top portfolio concern, and most see no relief in sight from trade and low yield risks. Yet institutional investors aren’t making big changes to their portfolios, and instead, are waiting out the current cycle until they’re comfortable enough with market conditions to make any portfolio moves.

Natixis surveyed 500 institutional investors, who collectively manage more than $15 trillion in assets for pensions, insurers, sovereign wealth funds, foundations and endowments around the world. Many respondents foresee well-established market factors on the horizon becoming a reality next year, with tangible negative impact on performance. According to the survey:

-- Nearly three-quarters (73 per cent) of institutional investors expect ongoing trade disputes to hurt their investment performance; 67 per cent are anticipating pain from slowing global growth and 59 per cent believe a hard Brexit will hamper performance in 2020; 

-- 76 per cent believe that persistently low rates have led to asset bubbles; yet, with rates so low for so long, more than half (54 per cent) worry that central banks do not have the tools they need at their disposal to manage any new market challenges; and 

-- 89 per cent are concerned that the explosion of public debt – a game-stopper for many past economic expansions – will have negative consequences for global financial security.

Overall, more than half of institutional investors (58 per cent) believe that the next global financial crisis will occur within one to three years.

“Institutional investors have been steadily fortifying their portfolios in anticipation of inevitable changes in the market cycle that could make 2020 a bumpy ride for unprepared investors,” David Giunta, CEO for the US at Natixis Investment Managers, said. “Despite a substantial amount of uncertainty next year, institutional investors remain focused on their long-term objectives and continue to see actively managed, diversified portfolios as a prudent path to outperformance.”

According to the Natixis report, The waiting game: Ten market trends institutional investors are watching for in 2020, institutional investors identify several factors that will drive their investment strategy in 2020. Key among them are:

Volatility leads portfolio concerns
In the year ahead, institutions rank volatility as their top portfolio risk (53 per cent), with 77 per cent saying that they expect greater volatility specifically in the stock market. Many also expect bond (67 per cent) and currency (52 per cent) volatility to rise.

Active management continues to gain support
Institutional investors will remain focused on active management to guide them through more volatile markets. Nearly three-quarters (74 per cent) of institutional investors say the market environment in 2020 is likely to be favorable for active portfolio management. Accordingly, investors continue to increase their allocations to active strategies while their use of passive strategies continues to decline. Current allocations are split 71 per cent active and 29 per cent passive, up from 64 per cent allocated to active management and 36 per cent to passive when surveyed in 2015.

Portfolio allocations largely unchanged
On average, institutional investors allocate 37 per cent of their portfolios to stocks, 39 per cent to bonds, 18 per cent to alternatives, and 5 per cent to cash. Their projected allocations heading into 2020 remain relatively unchanged. More precise fine-tuning occurs within asset sleeves, with notable decreases in exposure to US equities and government debt and increased exposure to emerging market stocks, investment grade corporate debt, real estate/REITs, private debt and infrastructure.

Overall, institutions express no distinct sector preferences for 2020; rather, they have split projections for outperformance and underperformance for most sectors. However, two exceptions are healthcare and information technology. Low rates, slow growth and a range of other factors add up to moderate market performance, according to institutional investors surveyed.

Alternative paths to growth
Natixis found most institutions have turned to the private markets, primarily for diversification (62 per cent) and more attractive returns (61 per cent) than they expect from traditional stocks and bonds. Most institutions now use private equity (79 per cent) and private debt strategies (77 per cent), and two-thirds (68 per cent) see private assets playing a more prominent role in their long-term portfolio strategy, in spite of associated liquidity risks. Seven in ten (71 per cent) institutional investors feel the return potential of private assets is worth the liquidity tradeoff.

Next year, 37 per cent of institutional investors plan to increase their allocations to private debt as well as private equity (28 per cent), real estate (29 per cent) and infrastructure (32 per cent). However, the growing popularity of private investments creates new challenges. Eighty-six per cent of institutional investors are concerned about too much money chasing too few deals in the year ahead, and three-fourths wonder whether public markets are now overvalued.

Politics are the elephant in the room
Historical market trends during election years may not help predict the outcome and impact of the 2020 US presidential election, but 64 per cent of institutional investors around the world agree that the campaign cycle itself will be a significant source of volatility next year. Investors are fairly split on how the markets would react to a change of administration in the White House and/or Democratic control of both houses of Congress. In the meantime, 54 per cent think the ongoing impeachment process will have a destabilizing effect on the markets.

Beyond the US 2020 elections, 69 per cent of institutional investors believe that the geopolitical ramifications of foreign election interference are a growing problem globally. They primarily use two key strategies to manage geopolitical portfolio risks. Nearly half (48 per cent) rely on scenario analysis to project outcomes for a range of events and potential outcomes. Almost the same number (47 per cent) have capital buffers and reserves in place to help them navigate negative market outcomes.

Risk is rising with popularity of passive
As investors have flocked to passive investments in recent years, institutional investors see significant risks ahead for individual investors and markets in general. Most significantly, 54 per cent of institutional investors believe that the excessive use of passive index funds suggests the market is ignoring fundamentals. Seven in ten (73 per cent) suspect individual investors will prematurely liquidate investments over recession worries, but 64 per cent worry that outsized flows into and out of index funds and other passive investments will contribute even more to volatility.

Another concern, according to 74 per cent surveyed, is that individual investors have a false sense of security about passive investments and are unaware of their risks (71 per cent).

“Previous studies have told us that institutions have been increasingly cautious in their outlook, and their portfolio positions reflect those concerns,” said Dave Goodsell, executive director of Natixis’ Center for Investor Insight. “The sentiment from institutional investors tells us that the question is not whether risk and volatility will impact markets and volatility, but when.”

Methodology: Natixis Investment Managers surveyed 500 institutional investors, including managers of corporate and public pension funds, foundations, endowments, insurance funds and sovereign wealth funds in North America, Latin America, the UK, Continental Europe, Asia and the Middle East. Data were gathered in October and November 2019 by the research firm CoreData.

RBC Wealth Management 2020 Key Trends
Comments are from Ross Jennings, head of sales and relationship management at RBC Wealth Management.

"We expect the next year to see a continuation of long-term shifts in the wealth management landscape, some of which are not unlike those we are seeing in the banking and finance industry more generally.

Operationally, greater integration of technology to improve the client experience will continue to be a key focus for wealth management firms. This is with the view to not only to respond to the demands of a younger, always-on, client base, but also to augment the role of relationship managers to give them the tools to better service their clients regardless of where they are.

Continued demographic diversification in the client base is another key trend that the industry will need to continue to adjust to. The pace of wealth accumulation among Millennials and women of all generations will continue to increase as a result of the boom in tech-driven innovation and this creates significant demand for wealth management advice and wealth preservation strategies, presenting a significant opportunity for wealth managers who can offer bespoke wealth management services to meet their needs, as well as, in turn, diversify its own workforce to be better aligned with the changing client demographics.

Another trend concerns the fact that life expectancy continues to increase, and families will find three and, in some instances, even four generations of family members alive at the same time, with newer members becoming successful entrepreneurs themselves in their own right. Against this backdrop, independent advice and the ability to manage and represent often diverse interests while preserving the family’s legacy, will require wealth managers to create structures which will help families navigate that complexity in an environment which fosters collaboration between the different generations.

Finally, from a client perspective, I believe that there will be continued momentum throughout 2020 towards increasingly incorporating Environmental, Social and Government (ESG factors) into portfolios, with the aim to both protect and enhance returns for the long term.

From an investment perspective, the industry’s biggest challenge and opportunity in 2020 will be to navigate the macroeconomic environment, which continues to be categorized as ‘unchartered territory’.

We expect central banks’ 2019 accommodative monetary policies, as well as some additional fiscal stimulus, can keep most developed economies growing through 2020 and probably longer, continuing to support growth in corporate earnings, dividends and buybacks, though wealth managers should be cautious of inflationary pressures on over-exposure to stocks. A well-balanced global investment portfolio should help clients avoid complacency.

Furthermore, continued persistence of low interest rates means that the search for yield becomes even more important, with clients increasingly hungry for insights and ideas which will help them deploy capital effectively. Wealth managers who are part of large global universal banks and thus have relationships across public and private capital markets will have an opportunity to become even more relevant to their clients in 2020.