Investments in credit will be a hive of activity this year as the role of banks in lending continues to fall and investors make decisions about the place of sovereign debt in their portfolios, according to Mercer.
The consultant, which has outlined economic and financial challenges for investors in 2012, says the scarcity of credit, as well as the reduced role of banks in lending, provides possibilities for investors to build and broaden credit portfolios.
Further, it says that investors need to make some “sharp judgments” on sovereign bond investing, specifically whether they want insurance or investment returns.
Mercer says the macro environment, which will continue to be fast-moving and volatile, will be challenging for stock-pickers, with manager success depending more on overall positioning than bottom-up stock selection.
This will mean investors should expect greater discipline from those we deploy their capital and seek to ensure “agents do not extract unfair rewards”, and active management fees will experience continuing pressure.
According to Mercer the economic uncertainty lends itself to portfolio flexibility, and predicts that more institutional investors will move to a floating strategic asset allocation mindset where the investment strategy evolves and morphs over time.
Mercer says that faced with a challenging and unfavourable economic backdrop, institutional investors should focus on agility, flexibility and efficiency when planning for the year ahead.
Mercer says the key economic and financial challenges for 2012 will be:
- An improving US economy and the continued strength of emerging market economies could yet lead to respectable global growth, though significant downside risk remains. A challenged Europe however poses a very real threat to global economic prospects.
- The Eurozone financial crisis is yet to be played out and the saga will continue as politicians try to implement a blueprint for a fiscally-responsible Europe.
- Further coordinated policy responses from political and financial authorities could ease the sense of crisis in the short-run but could equally raise long-term inflation expectations.
- Focus on “fair capitalism” will increase, including consideration of the rewards for capital versus labour, of principals versus agents and of inter-generational equity.
- The scope for further shocks, from diverse sources, will remain elevated. Even if the gloom of abject growth lifts, the fog of uncertainty is likely to remain.