A majority of institutional investors predict the global financial system will suffer another crisis within five years, according to a survey of 500 institutional investors across 28 countries, conducted by Natixis Investment Managers.
Some 64% of money managers surveyed say the next crisis will hit within one to five years, while just 9% do not foresee another global financial crisis 10 or more years out.
More than 6 in 10 respondents think that government debt will be a “contributing factor” to the next crisis, while nearly half of respondents think one or more asset bubbles will be a key catalyst.
“One of the realities of the post-crisis market has been the explosion of public debt. Yet despite 10 years of slow economic growth and declining tax revenues, unabated public spending continued across the developed world,” according to an analysis of the survey results by Natixis.
“Between 2008 and 2016, [Organization of Economic Cooperation and Development] reports that public debt has ballooned from 61% of GDP to 86% of GDP in just eight short years. This runs in stark contrast to the previous ten-year period in which public debt actually dropped 17%, from 66% to 55% of GDP,” the report reads.
High government debt loads could increasingly become a problem for financial markets as interest rates rise, because debt issued during years of low interest rates will eventually have to be refinanced at higher rates, “increasing the cost of debt substantially,” according to Natixis. It cites a recent Congressional Budget Office projection that net interest payments by the U.S. government will rise from 6.3% of GDP today to 29% of GDP in 2048.
Other bubbles institutional investors are worried about include tech stocks, the Chinese economy, and the stock market more broadly.
Even as institutional investors are bearish in the medium to long term, they see no reason to radically shift their investment approaches going into 2019. The biggest change in strategy will come in the form of reducing exposure to U.S. equities, with 41% or respondents reporting that they will take step in anticipation of a slowing U.S economy and corporate profit growth, though just as large a share said they will maintain their current allocations to U.S. stocks.
Investors do see potential short-term risks coming from geopolitics and trade disputes, with 77% of respondents predicting that domestic and international politics will hurt portfolio performance in 2019, though the average respondent still believes it can produce a 6.7% return next year.
“Politics continue to be volatile as populism and nationalism eat away at the global world order that has been the norm for seventy years,” the report reads. “Faced with a U.S. retraction from multilateralism, the rise of populist leaders across the globe, and the growing influence of China and Russia over global affairs, theses changes are not taken lightly by [institutional investors].”
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