A midyear survey uncovers optimism on this year’s returns, tempered by outlooks on macro risks
After the turbulence that roiled financial markets late last year, investors were understandably taking a more defensive attitude coming into 2019. But the past months have led up to a better-than-expected situation for many.
“As the first half of 2019 is coming to a close, the year-to-date market rally has extended beyond most investors’ expectations,” wrote Matthew Bartolini, head of SPDR Americas Research.
Citing SPDR’s findings from a survey of over 500 investment professionals, Bartolini said the majority of investors are feeling optimistic about US equity markets, to the point of calling an over 5% increase in the S&P 500 for the year. Considering that the market was up by around 15% at the time the survey was taken, he said, that means total expected returns for 2019 are roughly 20%.
“This would be the best single-year return since 2013—a time when interest rates were still held to the zero bound and the Federal Reserve was still conducting quantitative easing,” he said.
Noting the different monetary policy environment today, Bartolini added that investors’ optimism is counterbalanced with a healthy dose of caution arising primarily from macro reasons. The top three concerns cited by investors were geopolitical/international trade tensions (61%); a global economic and earnings recession (48%); and the end of the US equity bull market (47%).
China was a main locus of anxiety on the geopolitical front, with investors remaining heavily focused on its soured relationship with the US. But the survey found few respondents worrying over a hard landing of the Chinese economy, with only 17% citing that as a concern. “This could be a sign of increased confidence in the Chinese government’s ability to navigate their growth dynamics through extensive fiscal policy,” Bartolini suggested.
The survey also looked at asset-allocation attitudes heading into the second half of 2019, determining where investors are willing to increase or decrease their exposure. Respondents showed an overall willingness to increase exposure to investment-grade credit, which garnered the highest ratio of increase to decrease percentages. Emerging markets also got a broadly positive evaluation, as 40% of respondents indicated plans to ramp up their allocations.
“However, we note that this survey was taken while trade tensions appeared to be softening,” Bartolini said. “As recent rhetoric has reignited fears of a trade war escalation, the results of this survey might look somewhat different today.”
On the bearish side, the survey found investors shifting away from high-yield bonds, with 30% planning a decrease. With credit spreads going as low as 34% below the long-term 20-year median, based on Bloomberg figures from April 29, “high yield bonds present less upside relative to downside on a forward-looking basis.” The results for US large-cap stocks were mixed; investors disclosed their intentions to give more portfolio weight to small-caps, but also expected to increase allocations to cash.
Investors were also less willing to adopt specific sector exposures, with “none” being the most popular choice for underweighting sectors and the top-fourth choice for overweighting sectors. “[O]ur Midyear Investor Survey does indicate that investors remain confident,” Bartolini said. “However, some responses about portfolio positioning tell a story of more tempered optimism, with an emphasis on managing portfolio risk.”
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