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5. A Fiscal Policy Fiasco

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Half of Institutional Investors See High Inflation in 3 Years: Poll

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Clearwater Analytics released a flash poll of some 100 institutional asset managers and owners on Friday that asked how they are adjusting their investment strategies as a result of surging inflation. 

Two-thirds of respondents, who represent more than $4 trillion in assets under management, said inflation is non-transitory, and they expect it to have a material effect on the U.S. economy.

Asked about their rate expectations, a large majority of asset managers said they expect a 100- to 200-basis-point increase from current rates.

As to where inflation will be in three years, 40% of investors think consumer price index growth will settle in at 3% to 4% — a lot higher than the long-term level of around 2% in recent decades. Only 10% of investors said they expected inflation to persist at high levels of 5% or more. 

Thirty-two percent expressed hope that inflation will return to long-term levels below 3%.

About 30% each of poll respondents were insurers and asset managers; 13% were corporations; and 11% represented other segments, including governments. 

Strategy Changes

Their concerns are prompting most investors to make changes to portfolio allocation and risk, but a third said they would stay the course.

Forty-eight percent of respondents said they were turning to floating bank bonds and bank loans amid the inflation surge, 42% are looking toward real assets and 38% favor equities. Clearwater noted that with stocks at record levels, investors appear to believe “you can’t live without them,” given the alternatives.

Other asset classes enjoy less favor among investors, with 30% citing commodities and 25% Treasury inflation-protected securities and cash. 

Clearwater said that as many institutional investors draw back from the volatility of commodities, TIPS may offer inflation protection, though their nominal yields are low, and cash is safe.

As to risk reduction, 14% of those for whom equities are in play said they plan to lighten up. A third said they would reduce allocations to fixed income, and half will reduce duration as the Federal Reserve announces rate increases.

In response to a question related to rate hikes, 80% said they expected to see the 10-year Treasury rate in the 2%-4% range in three years, while 10% said it would be lower than 2% and 10% expected it to be higher than 5%.