A survey commissioned by WisdomTree, the exchange-traded fund (‘ETF’) and exchange-traded product (‘ETP’) sponsor, has revealed over half (54%) professional investors in the Benelux region perceive geopolitical conflicts to be the biggest risk facing investors over the next 12 months[1].
The survey, conducted by CoreData Research an independent research agency, polled 600 professional investors across Europe, ranging from wholesale financial advisory firms to wealth managers and family offices. The investors surveyed are responsible for approximately €710bn in assets under management.
Among Benelux-based professional investors, inflation (48%) and policy errors from central banks (46%) were the second and third biggest risks facing investors. The top three risks indicate that investors face a delicate balancing act to protect their portfolios in the current environment.
Nitesh Shah, Head of Commodities & Macroeconomic Research, Europe, WisdomTree, said: “The war in Ukraine remains front of mind for many investors, and the potential escalation of tensions between China and Taiwan adds to the uncertain and tense geopolitical landscape. The headwinds facing investors’ portfolios this year have felt relentless and with no clarity on how long the risks being faced will last investors need to prepare for more uncertainty. Investors do not like uncertainty, so sentiment is very much risk-off at the moment while central banks seek to curb inflation and policymakers attempt to stimulate economic growth and address geopolitical tensions and conflict.”
The survey reveals that most Benelux-based professional investors are predicting that inflation will continue to rise before peaking in 2023. Of the 58% who believe it will peak in 2023, 22% believe it will be by March and nearly one in three (30%) do not believe it will peak until June 2023. 38% think inflation across the European Union (EU) will peak somewhere between 10-15.9%. Interestingly, 60% of Benelux-based professional investors think the European Central Bank’s interest rates will be 1% or less in a year’s time.
Worries about the macroeconomic and geopolitical environments are unsurprisingly being reflected in their clients’ risk appetites. During the past 12 months, nearly two thirds (64%) of clients in the Benelux region have decreased their risk appetite, though around a quarter (28%) are still comfortable with the same level of risk.
Pierre Debru, Head of Quantitative Research & Multi Asset Solutions, Europe, WisdomTree, said: “Delivering returns in the current environment is particularly challenging, with stock markets and bonds suffering deep losses this year. Investors need to think about assets that will help protect their portfolios now and allow them to benefit when the market turns. There are still tools that investors can use to seek downside protection, weather the storm and grow for the long term. High-quality companies with high profitability combined with solid dividend paying credentials appear to tick most of the boxes.”
Allocation changes in response to the macroeconomic climate
In response to the volatile and inflationary environment, professional investors have been reassessing their portfolio allocations. In preparation for even higher inflation, over three quarters (78%) of Benelux-based professional investors intend to or already allocate to equities, this is significantly higher than the assets that have historically been better inflation hedges, such as gold (42%), a broad basket of commodities (38%) and inflation linked bonds (46%).
Of those who do invest in commodities already (68%), 7 in 10 (68%) do so for diversification purposes and 71% as an inflation hedge.
Despite the difficult economic landscape, 76% of Benelux-based professional investors expect to increase allocations to ESG[2] focused investment strategies over the next 12 months. If inflation remains persistently high, 60% of professional investors say they would consider dropping their ESG holdings in favour of strategies with a history of being inflation hedges.
