Institutions say 2025 will be the year that valuations matter
Louise Watson
Australian institutional investors’ top portfolio concerns for 2025 are inflation (55%), volatility (45%), and valuations (36%), with more than three quarters (77%) of institutions believing 2025 will be the year that valuations matter.
New research by Natixis Investment Managers (Natixis IM) found two thirds (64%) of institutional investors believe that current equity valuations don’t reflect fundamentals, and half of institutions think passive investing distorts relative stock prices and risk return trade-offs.
Institutions agreed the popularity of passive investments increases systemic risk to markets (50%) and are projecting an uptick in volatility in stocks (64%), bonds (64%), and currencies (59%).
Natixis IM surveyed 500 institutional investors which collectively manage US$28.3 trillion in assets for public and private pensions, insurers, foundations, endowments, and sovereign wealth funds from around the world, including Australia.
Given the changing interest rate and credit environment, 73% of institutions say that the markets will favour active management in 2025, and eight in ten (82%) say that active management is essential to fixed income investing.
Nearly nine in ten (86%) said that their actively managed investments outperformed their benchmarks in the last 12 months.
Natixis Investment Managers Country Head Australia & New Zealand Louise Watson, said, “After a bumper year for equity markets, where many have achieved outsized returns, it makes sense that institutional investors are carefully managing risk as we approach the new year. Equity markets have been surprisingly buoyant in a year packed with ongoing conflict, global elections, uncertainty around inflation and interest rates and simmering geopolitical tension.
Looking to 2025, institutions are faced with a melting pot of conflicts, more volatility, and the possibility that markets are teetering on a valuation cliff. It’s no surprise then that professional investors question how much of these market highs have been fuelled by passive money and carefully manage their active and passive allocations. Smart investors are looking ahead and making tactical allocation shifts now to position defensively and diversify into new opportunities and minimise the risk of inflated equity markets.”
Private market boom?
73% of Australian institutions are feeling bullish about the prospects for private equity in 2025, up from 46% the previous year. Almost half (47%) of Australian institutions are planning to increase investments in private markets in 2025, while nearly three in four (73%) anticipate that a 60:20:20 portfolio diversified with alternative investments will outperform the traditional 60:40 stock and bond mix.
But, institutions are proceeding with caution as nine in ten (91%) are increasing due diligence around private assets due to concerns around deal quality.
Economic threats
Institutional investors said the top economic threat was the expansion of current wars (41%), followed by concerns of a tech bubble (32%), China’s economy, and higher for longer interests rates.
Unsurprisingly, Australian institutional investors are bearish on US market outperformance (36%), instead 64% are placing bets on the outperformance of other international markets. Meanwhile, more than half (55%) think small caps will make headlines in 2025, as 63% think lower rates will enhance performance.
Overall, 60% of Australian institutional investors expect inflation will remain at target and rates will stabilise at a lower level (55%). Furthermore, they’re expecting 1-3 rate cuts in 2025 (77%) and nine in ten (91%) think the timing of rate cuts will be critical to ensuring inflation doesn’t reignite.
Seven in ten (73%) of Australian institutional investors believe that a lower growth environment will be the new normal in China and half (50%) believe that economic malaise in China will hold back growth in emerging markets.
Instead, 86% of institutions agreed that Asia Ex-China will be the best Emerging Market opportunity for 2025, and 73% say that India will surpass China as the top emerging market for investment.
