While institutional investors are optimistic about a soft economic landing and stable inflation in 2025, concerns about market valuations, interest rates and geopolitical tensions persist, Natixis Investment Managers’ annual survey of 500 institutional investors globally shows. on Wednesday 4 December 2024, the survey found that, despite easing recession fears and a continued decline in inflation, 47% of participants still consider equity valuations a key concern, while 43% cite interest rates as a major factor influencing their investment strategies.

Sebastien Sallée, country head Belux at Natixis IM, noted in the report that investors are approaching the new year with cautious optimism. While investors are aware of risks related to geopolitical tensions and potential macroeconomic shifts, Sallée suggested that most are confident the market will adapt to these challenges. He emphasised that, while few institutional investors are altering their long-term strategies, tactical allocation adjustments may enhance opportunities in the short term. Sallée stated, “Ultimately, long-term success will still be determined by how well they navigate current macroeconomic and market dynamics.”

Valuation concerns

The survey, which included institutional investors from 28 countries across America, Europe, Asia and the Middle East, found that concerns about equity valuations have intensified. Two-thirds (67%) of respondents questioned whether the current equity valuations reflect underlying fundamentals, a concern amplified by a two-year bull market driven by technology stocks. Looking ahead to 2025, three-quarters (75%) of investors expect equity valuations to come under closer scrutiny. A majority of respondents (72%) also indicated that central bank policies would be critical in sustaining the current market rally.

Inflation and economic growth

Recession fears have significantly declined. A year ago, 51% of institutional investors deemed a recession unavoidable, but this figure has dropped to just 30% in the latest survey. Nearly two-thirds (64%) of investors now anticipate a soft landing for the global economy, with fewer than one in five (18%) expecting a recession to disrupt the ongoing market rally. Investors also reported a more positive outlook on inflation. Two-thirds (68%) expect inflation to reach or fall below target levels in 2025, while only 32% expressed concerns about potential inflation shocks.

Geopolitics

Despite this optimism, geopolitical risks continue to weigh heavily on institutional investors. Tensions between the US and China were cited by 34% of respondents as a major concern, while 32% pointed to escalating global conflicts. Additionally, there was widespread expectation of heightened market volatility in 2025. A majority of respondents (62%) anticipated greater volatility in equities, while 49% expected increased volatility in currencies and 42% in bonds.

Alternatives and private equity

In line with shifting market dynamics, institutional investors are increasingly allocating capital to alternative investments. Six in ten (61%) of respondents believe a portfolio with a greater allocation to alternatives--such as the 60:20:20 mix (60% equities, 20% bonds and 20% alternatives)--will outperform the traditional 60:40 portfolio. Among alternatives, private equity remains a top focus. Nearly three-quarters (73%) of investors see the most opportunities in private equity, up from 60% last year. The ongoing low-interest-rate environment is expected to further benefit private markets, with 78% of institutional investors anticipating this trend to continue into 2025. Additionally, 73% expect a rise in private debt issuance to meet growing demand.

Over half (54%) of institutions have already increased their allocations to private markets, and 65% are actively seeking new investment opportunities, particularly those related to artificial intelligence (AI).

Emerging markets

While China’s economic slowdown is expected to pose challenges for global growth, institutional investors remain optimistic about emerging markets. Almost eight in ten (79%) respondents expect lower growth to become the new normal in China, with 60% believing this will constrain broader growth in emerging markets. Despite these challenges, more than half (53%) of institutional investors expect emerging market investments to appreciate in value in 2025, particularly as central banks continue to ease policies.

The survey also highlighted a shift in investor preferences regarding emerging markets. Three-quarters (74%) of investors identified Asia (excluding China) as the most promising investment opportunity for 2025, with 63% believing India will surpass China as the leading emerging market for investors.

Active management

In response to current market conditions, institutional investors are placing greater emphasis on active management, as opposed to passive vehicles like . Nearly three-quarters (70%) of respondents expect market conditions in 2025 to favour active strategies. This sentiment is supported by the performance of actively managed investments in 2024, with 67% of investors reporting that their active investments outperformed benchmarks. Active management, particularly in bond markets, is seen as indispensable by 70% of institutional investors, who cited the current interest rate and credit environment as key drivers for this shift.

Natixis IM, the firm behind the survey, manages €1.2trn in assets globally.