What Worries CIOs Most? Inflation and Valuations

For CIOs, climbing consumer prices and over-priced stocks are the biggest concerns, according to an annual poll of their sentiment.

The 2022 CIO Sentiment Survey was taken before Russia’s invasion of Ukraine, an event that stoked inflation further and rattled stock markets worldwide. “CIOs began 2022 feeling more confident about the health of their portfolios and their ability to meet returns than in any of the last three years,” the report notes.

Nonetheless, it adds, the results “hold a warning that after an extraordinary 2021, the risk of a painful downturn is high.” The survey was taken by CaseyQuirk, part of Deloitte Consulting, in collaboration with Top1000funds.com.

Even before the Ukraine war, inflation and hot stock valuations had emerged as looming problems. The Consumer Price Index had already started its climb in 2021, and lofty price/earnings ratios have accompanied the bull market that ruled for years (apart from a crash in early 2020 as the pandemic appeared). Even now, in 2022, with the S&P 500 down 7.8%, the index’s P/E is almost 23, still higher than the historical average of around 16.

Asset owners are responding to the current situation, the survey says. They are investing more in private markets—in infrastructure, private debt, and real estate—in a bid to beat inflation, the survey indicates.

And while stocks may be pricey, allocators are trying to keep costs down—and succeeding—by demanding lower fees for transactions. As “return targets remain challengingly high, high equity valuations are now a key risk,” the report says.

Some allocators, presumably corporate pension programs, are turning to de-risking—reducing their equity allocations. The CIOs, particularly at larger funds, report greater pressures from outside forces, such as from climate change activists, the survey finds.

All that said, allocators have confidence that they can meet their target returns, with 63% expressing a positive view, the highest showing in three years. Furthermore, 76% are willing to take more risks to reach those targets, the most in three years. Better funded status prompts the investment chiefs to take more risks than any time before in the period from 2020 to 2022.