Six months into 2018, investors have witnessed a stock market correction, the return of volatility, heated geopolitical tensions and rising interest rates. So, how are these events influencing investors and their asset allocation decisions as they position for the second half of the year? Our 2018 Mid-Year Investor Survey attempted to answer those questions. Here is what we learned after surveying more than 600 investment professional as part of our larger 2018 Mid-Year Outlook.
Investors' top three concerns:
- Geopolitics and trade tensions
- The end of the US equity bull market
- A global economic slowdown
Given 2018's heated rhetoric, it is not surprising that investors’ top concerns—listed above and captured in the chart below—are increasingly macro-driven. In our survey, 58% of respondents had a top concern directly related to fiscal or political actions. One in five respondents stated their top concern is geopolitics and trade tensions. This reflects a broader focus on global conditions, which come as international exposures comprise a more significant share of investor portfolios. The number of respondents stating that slowing global growth was among one of their top five concerns rose to 63%, an 8% bump from December when we conducted our previous investor survey. Tightening global monetary policies were the only other segment which saw increased concern, 47% today vs. 41% in December. The below chart depicts all of the investors responses in aggregate.
Mid-term elections? What mid-term elections?
One of the more interesting results from our 2018 Mid-Year Investor Survey was the low level of concern shown toward the mid-term elections. Potentially, investors lumped this concern into their worries over geopolitics and trade when answering our survey. Perhaps there has been so much political gridlock and tenuous talk that heated rhetoric is now seen as normal and whatever noise produced by mid-term elections will be just that—noise. But November elections could serve as a headline risk event, drumming up volatility. They should be on investors’ radar heading into the fall.
Another surprising finding? Bond market turbulence hasn't translated into investor worry. Survey respondents listing the bursting of the bond bubble as a top concern fell from 57% in December to 33%, and only two respondents listed widening spreads and high yield defaults as their number one concern. The latter point perhaps is a result of many investors selling their high yield exposure throughout 2018 as high yield ETFs had outflows in three of the five months this year, and the Morningstar US High Yield Bond Fund category had over $15 billion of outflows for ETFs and mutual funds combined in 2018.1
Stock market outlook: greater upside potential
Despite this year's stock market correction, investors still see market upside. As shown below, investors' median year-end forecast for the S&P 500® Index is 3.7% higher than it was in December—implying a 4.75% annual return for the index in 2018. While the recent moves higher for oil and interest rates have dominated market discourse, our respondents seem to think stock market current levels are here to stay. This is a paradigm shift from the start of the year when the median forecast for yields was 2.68%, and oil was expected to trade at two-thirds of its current level.
Asset allocation: Refining emerging markets, fixed income exposure
The chart below captures investors' shifting asset allocation plans, and it appears global concerns aren’t hindering interest in international exposures, particularly in the equity sleeve. Midway through 2018, 44% of respondents plan to increase their emerging markets (EM) equity exposure while 26% plan to increase their EM debt holdings. However, compared with five months ago, fewer investors are reducing their US equity exposure, while more investors are pulling back on allocations to Europe and Japan. Investors are headed overseas, but they are less willing to take country or region-specific risk, favoring broad-based exposure for diversification. Given the latest geopolitical concerns emanating from the Eurozone impacting sentiment and strengthening the dollar, it will be interesting to see if investors follow through on these indications of interest.
In fixed income, there is a high preference for floating rate exposure given the Federal Reserve's interest rate hikes. Conversely, in the fixed rate space, investors are less sanguine on credit risk, either high yield or investment grade. Despite spread widening and high yield defaults being the lowest concern among survey respondents, 35% said they are cutting exposure to the asset class (a point reinforced by the flows information above), while a further 11% have no exposure whatsoever.
Meanwhile, sentiment toward investment-grade has soured significantly. Eighteen percent of respondents are reducing exposure to the asset class, nearly twice the findings of December’s survey. This change may be a result of recency bias because investment grade debt is primarily impacted by interest rate risk. With rates rising precipitously, investment grade credit has posted a decidedly negative return in 2018. The corporate slice of the Bloomberg US Aggregate Index (“the Agg”) has fallen 116 basis points more than the heritage Agg bond index.2
Sectors: Sticking with technology and financials
In the sector space, investors are sticking with 2017’s winners and steering clear of defensive bond proxy sectors. Overweights to technology and financials remain elevated, at levels comparable to December. Interestingly, over a one-year period, technology overweights have declined slightly, with 57% of respondents overweighting the sector last May versus 54% today. Perhaps this reflects a bit of profit-taking after a powerful run over the past 18 months.
On a one-year basis, financials and energy have seen a higher percentage of investor overweights. For financials, this is likely a result of the uptick in rates and a more lax regulatory environment. Given oil’s price buoyancy in 2018, energy allocations saw the highest boost to sentiment in the first half. It will be interesting to see if investors follow suit with their plans, as these results were taken before the recent sell-off in oil prices predicated by comments from Saudi Arabia and Russia pertaining to oil production cuts being potentially relaxed as the global supply glut had been lessened.
Materials could be interesting to watch as higher inflation and commodity prices may benefit this sector down the road. Eighty percent of materials firms increased their margins in the first quarter of this year compared to a year ago.3 Materials posted the second-highest earnings growth in the first quarter, and it is projected to do so again in the second quarter.4 But there's a caveat: materials firms were not overwhelming beating first-quarter earnings as the revisions were modest at 2.2%.
Positioning for the remainder of 2018
To learn more about our 2018 Mid-Year Investor Survey, read our full 2018 Mid-Year Outlook report. You can stay tuned to SPDR® Blog to follow our 2018 Mid-Year Outlook blog series, where we'll explore strategies for positioning portfolios to address market conditions and investor concerns.
1Morningstar as of 05/29/2018
2Bloomberg Finance L.P., as of 5/29/2018
3FactSet, as of 5/18/2018
4FactSet, as of 5/18/2018
About the Survey
A total of 618 investment professionals completed State Street Global Advisors’ online midyear survey, the goal of which was to determine the investment concerns and client portfolio considerations that were top of mind for investment professionals. The survey was fielded in May 2018. Respondents represented a variety of investment professional segments holding a wide range of assets under management.
Bloomberg Barclays U.S. Aggregate Bond Index (the Agg)
A market-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most US traded investment grade bonds are represented. Municipal bonds and Treasury Inflation-Protected Securities are excluded, due to tax treatment issues. The index includes Treasury, Government agency bonds, Mortgage-backed bonds, Corporate bonds and a small amount of foreign bonds traded in the US.
The tendency of investors to extrapolate recent events into the future indefinitely.
S&P 500 Index
The S&P 500, or the Standard & Poor’s 500, is an index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.