Amid rising concerns about a downturn in the economic cycle, institutional investors are looking to mitigate risks by increasing allocations to private markets according to BlackRock’s annual survey of global institutions.

Globally, over half (56%1) of clients stated that the possibility of the cycle turning is one of the most important macro risks influencing their rebalancing and asset allocation plans. The survey indicates that private markets will be particularly popular in 2019. In a continuation of a multi-year structural trend of reallocating risk in search of uncorrelated returns, illiquid alternatives are set to see further inflows, with 54% intending to increase exposure to real assets, 47% to private equity, and 40% to real estate.

According to the survey of 230 institutional clients, representing over US $7 trillion in investable assets globally, over half (51%) intend to decrease their allocation to public equities in 2019. This shift is accelerating, as 35% of clients planned reductions in 2018 and 29% in 2017. This trend is most pronounced in the U.S. and Canada, where over two thirds (68%) plan to reduce equity allocations, compared to just 27% in Continental Europe.

“As the economic cycle turns, we believe that private markets can help clients navigate this more challenging environment,” said Edwin Conway, Global Head of BlackRock’s Institutional Client Business. “We have been emphasizing the potential of alternatives to boost returns and improve diversification for some time, so we’re not surprised to see clients increasing allocations to illiquid assets, including private credit.”

Fixed income set to attract inflows, cash remains important

Intended fixed income allocations have seen a spike, from 29% planning to increase allocations last year, up to 38% this year. Within fixed income, the shift to private credit continues as over half (56%) of global respondents plan to increase their allocations. Respondents also expect to increase allocations to other fixed income areas, such as short duration (30%), securitized assets (27%) and emerging markets (29%), likely reflecting relative value opportunities in these asset classes.

But the survey also finds that the majority of institutions want to maintain or even increase their cash levels in 2019, especially in the Asia Pacific region, where a third (33%) plan to increase their cash holdings to protect their portfolios.

“The move into fixed income is especially pronounced for corporate pensions, as many defined benefit plans are focused on de-risking, locking in improvements to funded status, and preparing for an end-game”, Conway added.

Shifting priorities within equities allocations – alpha-seeking strategies and ESG on the agenda

While the global trend is to reduce equity exposures over the short term, within equity portfolios, institutions are shifting their focus and priorities. The three most prominent considerations are to reduce public market risk within their portfolios, which was cited by two-fifths (41%), while a third (32%) will look to increase allocations to alpha-seeking strategies and a quarter (28%) will focus more on Environmental, Social and Governance (ESG) strategies and impact investing.

Conway concluded, “In a world of increased market volatility and great levels of uncertainty, clients are reimagining what they do with their risk assets. It’s important for clients to stay invested, with equities continuing to have a very significant role in portfolios and alpha seeking-strategies making particular sense in the current climate. We’re seeing clients becoming more purposeful about their alpha exposures going forward.”