INVESTOR SURVEY: Interest Rate Risk is Voted Highest Risk as Threat Toward Financial Market Stability

Posted on 09/27/2021


SWFI conducted its 17th consecutive proprietary global asset owner survey, polling only asset owners such as sovereign wealth funds, superannuation funds, and pensions, and excluding third-party fund managers. Global asset owners were polled in August 2021 for the September 2021 survey results.

They were asked, “In the current environment, which potential risk is the greatest toward financial market stability?”

In a repeat fashion, institutional investors viewed an increase in interest rate risk as the greatest toward financial market stability for the second time in a row over a viral pandemic or outbreak risk. With U.S. inflation looking less transitory, the Federal Reserve could take a tapering stance if Powell remains as Fed Chairman. The Federal Reserve ended its September 2021 meeting by announcing that it will hold the federal funds rate at its target range of 0% to 0.25%. However, the Fed signaled it will likely raise interest rates beginning in 2022, and there would perhaps be three more rate hikes in 2023. Bank of England Governor Andrew Bailey said on September 27, 2021, that he and other members of the Monetary Policy Committee saw a growing case to raise interest rates. For the current period, geopolitical risks also outweighed the COVID pandemic risk. This is apparent as the Biden administration and China delve into a deeper impasse on geopolitics and trade. Biden’s controversial fumbled pullout in Afghanistan and the Taliban’s unpredicted takeover has showed the world that the U.S. military empire is cracking. In addition, sovereign funds and pensions have priced in the pandemic risk, but they are cautious on central banks tapering, especially the Federal Reserve.

In addition for the first time since December 2020 survey, slightly more respondents see earnings expectations for listed companies to not improve in the next 12 months. This reflects a sentiment change on the optimism of earnings, which was at its apex in the June 2021 survey. This reversal could be attributed to proposed higher taxes by the Democrats who control the White House and Congress and the possibility of the Federal Reserve scaling back its massive QE program.

Overwhelmingly, global asset owners are increasing their allocation to private credit strategies – a trend that continues to remain over the years. Sovereign funds have anticipated and already increased allocations to private lending strategies. For example in September 2020, Mubadala Investment Company formed Barings Mubadala Enterprise (BME) – an evergreen origination platform seeking to provide financing solutions to European middle-market businesses. The Abu Dhabi Investment Authority (ADIA) has continued to back credit funds, while GIC Private Limited seeks to find niche partners for alternative lending strategies. Some sovereign funds and large pension funds view themselves as one-stop-shop capital providers for companies and sponsors. There was some planned underweighting toward passive U.S. equities. Furthermore, global asset owners remain to have lower exposures to Latin America, while favoring U.S., China, Europe, and Australia.

The survey can be viewed on SWFI.com.

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