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Asset Allocation

Stagflation Fears Have Pensions, Sovereign Wealth Funds Eyeing Alts

Facing an economic slowdown and higher inflation, institutional investors are turning to real estate, infrastructure.
By Michael Katz


The potential for stagflation over the next two years is one of the biggest concerns for global public pension plans and sovereign wealth funds, according to a report from the Official Monetary and Financial Institutions Forum.

“They expect a period of stagflation and will face huge challenges positioning their portfolios to cope with it,” the report said, referring to a survey of the investment plans of public funds worth more than $3 trillion. The survey results were included in the report, which covers the largest 100 public pension funds and 50 sovereign wealth funds in the world, with more than $27 trillion in combined assets.  “And they don’t expect inflation to disappear quickly—persistently high inflation is the top long-term concern of almost 50% of global public funds surveyed.”

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To prepare their portfolios for potential stagflation, the report said pensions and sovereign wealth funds have created a so-called “barbell approach” that combines a “flight to safety” with an allocation to alternative assets to provide an inflation hedge. Although fixed income and equities still accounted for more than three quarters of portfolios in 2021, more than 40% of the funds surveyed said they plan to increase their allocations to real estate and infrastructure assets over the next two years. The report also said they will look to improve returns by increasing their investments in private equity, hedge funds and commodity-related assets.

Pension and sovereign wealth funds that participated in the survey also said they intend to adopt more conservative strategies, such as investing in higher-rated government bonds and safe-haven currencies, moving away from equities and corporate bonds. The report said this reflects public funds’ concerns over higher policy rates, inflation and a global economic slowdown. It also said the funds were much more cautious regarding China than last year, mainly because of geopolitical tensions.

“As is typical in volatile times, a flight to safety is apparent. Global public funds will be net sellers of public equity and some higher-yielding fixed income assets,” Clive Horwood, managing editor and deputy chief executive officer of OMFIF, wrote in the foreword to the report. “They will put their money to work, reducing cash holdings. They will retreat to the stronger currency blocs, with dollar holdings rising appreciably and the euro benefiting as well.”

Key findings of the report included:

  • Pension funds are getting more active and moving away from liquid assets;
  • Almost 30% of surveyed funds plan to increase ownership of foreign assets, often with the help of external managers;
  • Climate change is one of the top two long-term concerns among more than 50% of the funds; and
  • More than 80% of respondents plan to invest more in renewable industries, and 50% plan to increase allocations to green bonds.

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Should We Really Be Afraid of Stagflation?

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Home > News > Market Moves > Inverted Yield Curve Passes Danger Line
Market Moves

Inverted Yield Curve Passes Danger Line

With the spread between short and long rates upside down for more than 15 straight trading days, that portends a recession for sure by August, Bespoke warns.
By Larry Light

 

The dreaded inverted yield curve, that banshee of the market, has been screaming doom for more than 15 continuous trading days with a spread over 0.5 percentage point. This constitutes the danger line. Hence, you can bet on a recession blighting our lives by next summer. That’s the take of Bespoke Investment Group.

In fact, the inversion got underway in late October, but only has been consistently over the half-point mark lately—and this has been going on now for 16 trading days in a row. As of Thursday, per the St. Louis Federal Reserve, the 3-month Treasury yielded 0.9 percentage point more than the 10-year T-note. There have been brief periods in recent years where the 3/10 curve flipped upside down, but they weren’t long enough to augur an oncoming downturn, in Bespoke’s assessment.

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In a classic 2006 paper for the New York Fed, economists Arturo Estrella and Mary Trubin found that an inversion of some length (at least three months, they said, although they didn’t specify the size of the spread or the back-to-back factor) indicated an imminent recession.

By Bespoke’s research, since 1962, there have been four other periods where the 3/10 curve inverted by at least a half-point or more for 15 consecutive trading days.  In each of those four instances, a recession ensued within eight months. Since the present gap is widening, Bespoke said the inversion should last a while.

Ergo, a 2023 recession should hit by August at the latest.

Certainly, a more benign take on the nation’s economic prospects looks toward the state of today’s economy. At the moment, things look fine, by the reckoning of Phil Palumbo, CEO of Palumbo Wealth Management, in a note to clients. He cited the New York Fed’s Weekly Economic Index, which paints a positive picture.

“The yield curve has been a reliable recession indicator, but we always look to verify trends with other data,” he wrote. “The index level is now back where it was before the pandemic,” indicating a solid economy.

Still, Palumbo added, some weakness exists in these numbers, which calls into question the positive reading’s staying power. Should the metric trend downward, he cautioned, “indications of a recession will become much clearer.”

 

Related Stories:

Should We Even Care If the Yield Curve Inverts?

 

Spreads Are Narrowing: Could We Get (Gulp) an Inverted Yield Curve?

 

With a Recession Enroute, Should Pension Funds Be Worried?

 

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