A new survey by PGIM Investments says elections and geopolitical risks are the top concerns among institutional investors, not inflation or the economy.
While cautious about U.S. and worldwide elections as well as geopolitical risks, institutional investors plan to maintain long term investment strategies that are aggressive and opportunistic.
That’s according to a new survey by PGIM Investments, the asset management arm of Prudential Financial, of 400 institutional investors in eight countries.
Here are some of the key findings of PGIM’s 2024 Global Risk Report: Resilient Investing Amid Geopolitical Uncertainty.
Geopolitical risks are the top concern
More than half of institutional investors surveyed, 56 percent, said geopolitical risks are the biggest threat to their investments.
About 48% identified the potential conflict in the Taiwan Strait and South China Sea was most likely to impact global markets in the next 24 months, due to its ties to asset prices. Also, roughly 27% said military conflict in the Middle East is the greatest risk.
However, institutional investors view these potential risks as short-term in nature, and most are not altering their long-term strategy. Specifically, about 33% said they plan to have an aggressive portfolio strategy and take on more risk by the end of 2025, while approximately 25% are already aggressive in their risk tolerance.
“It’s really, really hard to predict how this year political risks will evolve, and history tells us that they tend to be short-lived, unless it really escalates to something bigger,” Guillermo Felices, global investment strategist at PGIM Fixed Income, said. “So, for us to say okay, I’m going to modulate the level of risk that I take based on … geopolitics. I think it’s very hard, I don’t think they do it that way.”
Interestingly, the concerns about inflation and a recession have abated. In the U.S., 38% cited inflation as their top concern, while 27% in Europe said the same. Similarly, 38% cited economic growth as their primary concern, with 30% saying the same in Europe.
Investors are ready for elections
With more than 70 countries holding elections this year, including the U.S., investors also expressed caution around the outcomes of elections around the world. Approximately 56% said that the elections are a factor in their portfolio decisions.
Overall, some 29% said they moved more money into cash due to geopolitical uncertainty, with that number climbing to 41% in the U.S. This “flight to safety” will continue as 55% of global investors said they plan to increase cash positions heading into the elections.
While there is much uncertainty in the results, investors are ready for anything. Specifically, about 75% of institutional investors said their portfolios are moderately or well prepared for any repercussions stemming from major elections in 2024.
“It’s still kind of evolving about what a Harris administration will look like,” James Sonne, head of government affairs at PGIM, said of the U.S. presidential election. “But I think regardless, we don’t actually have a lot of surprises coming, and all of the kind of populists or protectionist stuff on this side of one administration versus the continuation of a lot of the policies on the current administration, are ones that investors are actually pretty well prepared for. And it’s not going to be as many plot twists as I think we’ve we looked at, particularly in 2016 and going forward.”
Managing risks
Overall, while institutional investors are cautious of the short-term risks, they are also focused on staying nimble and looking for investment opportunities that emerge from geopolitical shifts.
Also, they said broadly diversified portfolio, with adequate liquidity, is important to navigate and, if necessary, react to unexpected events.
“In a world with seemingly increasing geopolitical risk, having a well-diversified investment program that meets the investor’s needs is critical in helping investors navigate different scenarios. But, to do that, you need to have two key components. One is having a well-diversified strategic asset allocation that aligns with the investor’s long-term investment objectives,” Mao Dong, co-head of portfolio management at PGIM Portfolio Advisory, said. “The strategic asset allocation program should also be diversified across asset classes, liquidity, geography, and sectors in order to avoid overconcentration in any particular area.”
The second component is a dynamic asset allocation process that is nimble enough to navigate the different environments.
Quantitative models, buffered ETFs, increasing allocations to real assets, stress-testing portfolios with scenario analysis, and utilizing active strategies are other tactics to keep investors ahead of any potential changes.
