European pension plans regard Brexit as a headwind for global growth according to a report by CREATE-Research and Amundi.
The research, which covers 169 European pension plans with combined assets of €1.76trn (£1.51trn), shows plans believe Brexit will create an extra layer of uncertainty while asset prices are artificially inflated by quantitative easing (QE).
Almost all (92%) of respondents anticipate increased volatility over the next three years while 76% expect market prices to disconnect from fundamentals.
When asked how Brexit will affect pension plans over the next three years, 54% expect investment returns to decrease and 68% are predicting increased financial deficits.
It is expected that Brexit will affect asset valuations mainly via political contagion instead of corporate profits.
Asset allocation will be driven by an agnostic search for value, as QE has brought forward future returns. With ageing demographics, falling productivity and rising inequalities, the positive effects of QE are waning.
In this environment global equities and infrastructure are the asset classes of choice, favoured by 57% and 50% of pension plans respectively. This is followed by alternative credit (46%) and private equity (42%).
Currency funds and commodities are regarded as value traps, while Japanese equities and US government bonds are regarded as overvalued.
Low carbon strategies and environmental, social and governance (ESG) initiatives are seen to be game changers, because the markets will be increasingly pricing in the recent climate change targets. Other innovations include risk factor investing, multi-asset class funds and exchange traded funds.
CREATE-Research professor Amin Rajan said the report shows how pension funds are becoming more innovative in their approaches to asset allocation."
Amundi chief investment officer Pascal Blanqué agreed that pension plans are recognising the need for change.
"Pension plans across Europe have come to realise that they have a stark choice in this era of negative yields - continue to do what they have been doing and march nobly off a cliff, or adapt and change," he said. "Central banks and markets appear caught in a tight embrace for the foreseeable future, and to survive the turmoil investors need to venture before financial theories to develop new insights into generating returns."
The government will set up an infrastructure bank to support investment and to co-invest alongside investors including pension funds.
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