Global institutional investors have continued to increase their risk appetite and buy equities despite concerns about overvalued prices and a likely market correction in the near term, according to new investor behaviour research by State Street Global Advisors (SSGA), the investment management arm of State Street Corporation (NYSE: STT). (See attached media release and Asia Pacific snapshot).
The research, conducted with Longitude Research in January, highlights the contradictions faced by investors, who are under pressure to meet return expectations and funding commitments but face a lack of attractive alternatives in other low-yielding asset classes.
Most investors surveyed, particularly those based in Asia Pacific, increasingly expect to see a correction of 10-20 percent in developed and emerging equity markets in the near term. While 57 percent of global investors surveyed believed developed markets would contract between 10-20 percent in the near future, that figure rose to 67 percent among Asia Pacific respondents.
The main factors they said could lead to a possible correction in all markets were rising geopolitical risk and a slowdown in emerging markets.
Interestingly, despite the widespread expectations of a correction, investors globally showed a high degree of confidence in their ability to withstand a downturn. About 96 percent of APAC investors expressed that view, higher than the 89 percent in Europe and the US.
APAC investors said they had done relatively little to protect their portfolios against a downturn, in contrast to their peers elsewhere. Some 68 percent said they had made no change to their level of downside protection and generally accepted that volatility was the “new normal”.
The research shows a continued push into equities with 63 percent of global investors and three quarters of APAC investors increasing their allocations to developed market equities in the six months leading up to the survey.
Almost one in two global investors (48 percent) and 51 percent of Asia Pacific investors surveyed had continued to buy emerging market equities during that time.
“Investors are facing a difficult balancing act: while many are concerned about a potential downturn and would prefer to reduce their equities exposure, they need to hold equities if they’re going to have any chance of meeting their long-term return expectations,” Mark Wills, head of SSGA’s Investment Solutions Group for Asia Pacific, said.
“But their confidence in being able to weather a sharp correction is potentially misplaced,” he said. “As we saw during the global financial crisis, the traditional diversification strategies adopted by a large number of investors have limitations in preventing significant capital losses.”
“If investors believe volatility is here to stay, they would be well-advised to address portfolio risk and investigate lower-cost solutions such as investing in low volatility equities, managed volatility indices and objective-based strategies which measure against a desired result rather than a traditional index.”
The survey canvassed 420 chief executive officers, chief investment officers, portfolio managers and directors at private and public pension funds, endowments, foundations and sovereign wealth funds in America, Europe and Asia Pacific.
Source: SSGA
