New research from Greenwich Associates finds that most institutional investors are expecting a worldwide economic downturn this year, due to the ongoing credit market disruption.

In February, Greenwich Associates surveyed 234 institutional fixed-income and equity investors in Asia, Europe and North America about the impact of the liquidity crisis that began in August with the collapse of the U.S. sub-prime mortgage sector.

It found that 70% of the large institutional investors think turmoil in international credit markets will push the United States into recession in 2008 and almost 60% think the still-unfolding crisis will result in a global economic downturn.

Looking ahead to the remainder of this year, these investors see a new cause for pessimism: more than 70% of the investors believe that companies throughout the world will find their ability to borrow constrained this year. “If companies begin to have trouble obtaining credit, a crisis that until now has been mainly a concern of financial institutions will begin to have a real and dramatic effect on the global economy,” says Greenwich Associates consultant Tim Sangston.

The survey was conducted as a follow-up to a September 2007 study on the crisis. It found that for some products credit conditions have actually deteriorated since September.

“There is a growing realization that by the first half of 2007 liquidity had become unsustainably cheap, and that the conditions we saw last June are not likely to come back any time soon — if ever,” says Greenwich Associates consultant Frank Feenstra. “But growing fears of systemic risk and doubts about the soundness of some counterparties show that investors are increasingly worried about the ability of some markets to function properly on a much broader level.”

It also discovered that: about one-third of institutions say they suffered losses due to direct exposure to mortgage-backed securities; nearly 30% of investors report taking direct losses on investments in CDOs or other structured credit products, CDO losses have been most common in the United States (31%), and least common in Canada, where only 18% of investors said they have lost money on CDO investments; also, 35% say their assets under management have declined as a direct result of the global liquidity crisis. Finally, more than three-quarters of the institutions cited systemic/market risk as their number-one concern, up from 56% in September.

“The global flight-to quality is all too apparent in our research results,” says Sangston. “Around the world, almost 60% of institutions participating in the February study say they are changing or have already changed their investment strategy in response to the credit crisis. Among institutions changing their strategies in Asia and the United States, 60% are moving up the credit ladder, as are 45% of these investors in Canada and Continental Europe.”

Although the results of the 2008 Greenwich Associates Global Credit Markets Study paint a grim picture, they are not entirely without positive signs, the firm noted. “In particular, 37% of the institutional investors planning to change their strategies as a result of the credit market turmoil are actively seeking investment opportunities in illiquid securities trading at deeply discounted prices,” says Greenwich Associates consultant Woody Canaday. “While that might not constitute a silver lining, it does suggest that a meaningful share of sophisticated investors see a bottom to this historic crisis.”