Interest rates, inflation and elections: what’s dominating investor sentiment?
Our Global Investor Insights Survey uncovers the political and economic themes that are top of mind for investors globally.
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2024 has been a year of change for the global political and economic landscape, with record numbers of elections taking place and central banks pivoting to interest rate cuts.
Of these two themes, central bank policy is the one most likely to influence portfolio performance in the next 12 months. That is according to respondents of Schroders’ Global Investor Insights Survey, which analyses the investment perspectives of 2,830 global financial professionals representing pension funds, insurance companies, family offices, endowments & foundations, gatekeepers and wealth managers.
While central bank policy emerged as the chief factor likely to influence portfolio performance, it was closely followed by high interest rates and the risk of an economic downturn. These answers are inter-connected and suggest that investors fear high interest rates are beginning to have a negative impact on the global economy. Investors may further be concerned that central banks may have left cutting rates too late to fend off a more pronounced downturn.
In a year that began with markets expecting five or even six rate cuts from the Federal Reserve, it is perhaps unsurprising that central bank policy - along with high interest rates - is a key concern for many investors. Those expectations for significant US rate cuts were quickly scaled back as inflation proved sticky. At the time our survey was conducted (June-July 2024), none had been delivered, though there has since been a 50 basis point cut in September.
Central bank policy tops list of factors most likely to influence investment performance
George Brown, Senior US Economist, said “In recent months, a combination of soft inflation and growth concerns has led to renewed expectations of sizeable US rate cuts. Indeed, most major central banks are in easing mode to reduce the burden of high interest rates on growth, and this should provide a supportive backdrop for risk assets such as equities.
“However, the risk around central bank policy is not confined to keeping rates too high. Cutting too swiftly creates its own risks, especially as we continue to anticipate that the US economy will avoid recession and achieve a soft landing. Delivering aggressive rate cuts at this stage of the economic cycle could stoke inflationary pressures. And clearly that is a concern for investors too given that over 60% of survey respondents highlighted inflation risk as an influence on portfolios.”
While all asset classes are affected to some degree by changes in monetary policy, fixed income bore the brunt of the sharp rise in interest rates after years of being close to zero. As rates increase, bond prices typically decrease. So it’s unsurprising that concerns about macroeconomic risks and central bank policies are top of mind for investors in fixed income specifically, as the chart below shows.
What do you see as the biggest threats to fixed income investing over the next one to two years?
Elections may be noise, but policy matters more in the longer term
Political risks also feature high up on the list of concerns for fixed income investors. However, these worries may not be related directly to this year’s busy electoral calendar. In fact, the survey reveals that investors are fairly sanguine about this year’s multitude of elections and their impact on their investment risk/positioning.
More than 40 countries representing three quarters of the global investable universe have held, or are scheduled to hold, national elections. However, only a minority of survey respondents have adopted more defensive or risk-off profiles due to the heightened uncertainty that elections bring. A large proportion (41%) deem the elections to be simply short-term noise that will not impact their long-term investment strategy.
Johanna Kyrklund, Co-Head of Investment and Group CIO, said “The most important election is still ahead of us with Americans heading to the polls next month. However, it is important to remember that politics tends to play out in months and years, rather than days.
“The results of this survey also clearly show the tension facing central banks and policy makers as almost as many clients are as concerned about inflation risk as they are about high interest rates.”
Do you believe the elections taking place globally this year will impact your investment risk appetite/positioning?
As we can see from the chart above, there were some notable regional differences on this topic. Respondents in North America were most likely to not change their investment strategy, while those in Central and South America were the most likely to adopt a defensive or risk-off investment profile due to election uncertainty.
Adam Farstrup, Head of Multi-Asset, Americas, said “The data shows that a slim majority of North American respondents are not swayed from their long-term policy by political risk and election impacts. However, that still leaves 47% of respondents changing their risk profile due, at least in part, to concerns around elections and politics. That may reflect the level of change perceived in policies represented by these forthcoming elections.”
Changes to trade alliances are an area of concern
When it comes to national policymaking, investors highlighted political and trade alliances as the area that will have greatest effect on investments in the next five years. This suggests that while the electoral cycle itself is not seen as a key risk, any potential reconfiguring of international alliances will be closely scrutinised. It is notable that respondents in APAC and Central & South America were the most likely to highlight worries about politics and trade.
Which areas of national policy-making do you believe will have the greatest effect on investment in the next five years?
David Rees, Senior Emerging Markets Economist, said “Concern about US trade policy has the potential to cause volatility in emerging markets. The Mexican peso was highly volatile ahead of Trump’s 2016 election victory. And the imposition of Trump’s tariffs also caused Chinese markets to underperform in 2018/19.
“But it’s important not to overstate the risks. While tariffs have caused China’s direct share of exports to the US to fall, its share of world exports has remained high as goods have been re-routed through third parties. More hawkish policy towards Mexico, combined with anti-immigration measures, is clearly a possibility. However, the United States-Mexico-Canada Agreement (USMCA) trade deal was already renegotiated during Trump’s first term and isn’t due to for review until 2026.”
Government borrowing also emerged as a factor likely to affect investment, with North American respondents the most likely to highlight this. Adam Farstrup said “With US government debt levels rising to concerning levels, investors see little commitment from the major political parties to structurally address deficits and the debt.”
The need to ramp-up military spending in the face of ongoing global conflicts may be one reason why government borrowing is in the spotlight. Demographic change, and the healthcare demands of an ageing population, could be another.
Johanna Kyrklund said “High public debt loads are a key concern in many major economies. Although private sector balance sheets have generally come out of the Covid era in good shape, public balance sheets remain precarious. A key risk to be cognisant of is whether geopolitical events and growing debt piles may eventually significantly destabilise bond markets. Key things to watch are the credibility of institutions and who owns your debt.
“Ultimately, the main way for investors to protect themselves against these risks is via diversification. That might be by region, by asset class and by looking at private as well as public markets.”
- Click here to view the full report: Global Investor Insights Survey
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