Investors Weigh in on OECD's Dire Economic Outlook

The Organisation for Economic Cooperation and Development (OECD) sees 2013 global growth of 2.9%, down from 3.4%, so how will that impact institutional investors?

(November 27, 2012) — The Organization for Economic Cooperation and Development (OECD) has slashed its global economic forecasts, highlighting the risks of a “major” global recession.

“After five years of crisis, the global economy is weakening again,” OECD Chief Economist Pier Carlo Padoan said today in the organization’s semi-annual Economic Outlook. “The risk of a major contraction cannot be ruled out.”

According to the Paris based think-tank’s report, GDP growth across the OECD is projected to match this year’s 1.4% in 2013, before gathering momentum to 2.3% for 2014. In the United States, assuming the “fiscal cliff” is avoided, GDP growth is projected at 2% in 2013 before rising to 2.8% in 2014. In Japan, GDP is expected to expand by 0.7% in 2013 and 0.8% in 2014. “The euro area will remain in recession until early 2013, leading to a mild contraction in GDP of 0.1% next year, before growth picks up to 1.3% in 2014,” the report said.

“Additional easing is required in the euro area, Japan and some emerging market economies, including China and India,” Padoan said. “If serious downside risks were to materialize, further policy support would be essential,” including additional quantitative easing and temporary fiscal stimulus by countries “with robust fiscal positions, including Germany and China.”

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Another OECD report released in July of last year similarly questioned the recovery of the global economy, noting that while pension assets had returned to pre-crisis levels, full recovery remained uncertain. The OECD asserted that pension funds faced numerous challenges and risks, such as accounting and regulatory changes. The report also showed that six OECD countries had not seen assets recover in local-currency terms. Those countries consisted of Belgium, where assets were 10% lower than in 2007; Ireland, 13%; Japan, 8%; Portugal, 12%; and Spain and the US, which were both down by 3%.

The implication for institutional investors, according the consultants from Hewitt EnnisKnupp, is a pursuit of alternative investments–such as hedge funds, private equity, and real estate–among mainly public pensions along with endowments and foundations. Corporate pension schemes are often in a derisking phase, and are thus focusing their alternatives allocation in more liquid areas, such as hedge funds, according to Mike Sebastian, a partner at Hewitt EnnisKnupp. “Less liquid alternatives is still not an area institutional investors can build exposure to very quickly.

He continued: “We’re seeing investors becoming more and more concerned about the prospects for equities–they’re between a rock and a hard place,” he said. “Due to geopolitical and other risks on top of weak bond market prospects, clients are reacting in two main ways: 1) diversifying away from equity risk, or 2) becoming more dynamic.”

So what’s the way for investors to be most successful with alternatives? Clients who can tolerate the cost, complexity, and illiquidity should consider opportunity-type allocations of 40% of their return-seeking assets to private equity, non-core real estate, and hedge funds, Sebastian told aiCIO in August. “For endowments and foundations, they’re already there, but for public pensions, this could be a significant change,” he said, referring to one of his latest papers titled “Go Big or Go Home: The Case for an Evolution in Risk Taking.”

Sebastian responded to the OECD’s most recent outlook by adding that while the US fiscal cliff situation is a major concern, he is hopeful for a resolution. “Even if the fiscal cliff situation is resolved (and we think it will be), the impact on the bond market will be eroded. The implications on the US market’s future ability to repay debts and manage the fiscal situation is dependent on parities getting together and resolving longer term issues.”