As the first half of 2019 is coming to a close, the year-to-date market rally has extended beyond most investors’ expectations. Our 2019 Midyear Investor Survey gave us a great opportunity to hear how investors are feeling about this surprisingly strong rally—and how they’re positioning their portfolios for the rest of the year. Here’s what we learned after surveying more than 500 investment professionals:
Cautious optimism abounds
Investors are still feeling optimistic about US equity markets, with the majority of respondents indicating they believe that the S&P 500® will increase by over 5% for the year. If this holds, given that the market was up around 15% when the survey was taken, it would translate into a roughly 20% return for 2019. 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. As monetary policy is different today, however, investors’ optimism is tempered by a healthy dose of caution—mainly for macro reasons—as evidenced by their top three reported concerns:
- Geopolitical/international trade tensions
- A global economic and earnings recession
- End of the US equity bull market
Geopolitical concerns continue to be in the forefront of investors’ minds, which is consistent with the results of our last two surveys. And with presidential tweets sending markets into a spin over US/China trade war concerns, we’re frequently reminded that geopolitical rhetoric can have a material impact on market sentiment.
Investors cite the fear of a global economic and earnings recession as another top concern. This is not an unfounded worry, especially since we only narrowly missed negative earnings growth for Q1. The deteriorating earnings growth picture is indicative of just how late-cycle this market has become—and how slowing economic growth is likely here to stay.
It’s also interesting to note what investors don’t cite as a top concern. Even as investors remain heavily focused on China, they don’t report a potential hard landing of China’s economy as a primary concern. This could be a sign of increased confidence in the Chinese government’s ability to navigate their growth dynamics through extensive fiscal policy.
Asset allocation: Bullish on emerging markets, bearish on high yield
With respect to asset allocation trends, the chart below reveals where investors are willing to increase or decrease exposure as we head into the second half of 2019. Any asset class below the line indicates more bullish sentiment, where respondents are more inclined to increase allocations relative to the percentage seeking to decrease. Investment-grade credit has the highest ratio of increase to decrease percentages, reflecting the strongest agreement among respondents on where to position. This indicates investors’ preference to move up in quality this late in the cycle.
Emerging markets is a key area where investors are increasing allocations, with 40% of those surveyed indicating that they plan to do so. This is likely a result of the attractive valuations in the region combined with supportive demographic trends. However, we note that this survey was taken while trade tensions appeared to be softening. 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, investors cited high yield bonds as an area where they plan to reduce allocations, with 30% planning a decrease. High yield not only had the highest decrease percentage, but also had the highest ratio of decrease to increase. As credit spreads continue to tighten—currently they’re 34% below the long-term 20-year median—high yield bonds present less upside relative to downside on a forward-looking basis,1 and may partially explain these survey results.
Consistent with our theme of ‘cautiously optimistic’ attitudes toward US equity markets, US large cap results were mixed. While investors are planning to increase their small-cap allocations, they are also expecting to increase allocations to cash. Lastly, while broad developed ex-US is on the bullish side of the ledger, specific country or region allocations to Europe or Japan are not. The latter reflects the unwillingness of investors to take on country- or region-specific risk, but rather be broadly diversified outside the US.
Sectors: Investors take a risk-off stance
Reported sector over- and underweights reveal investors’ unwillingness to express risk in this late-stage economic cycle. One of the most noteworthy takeaways of our poll on sector exposures is the popularity of the choice “none” when investors are asked where they are taking sector bets. As shown below, this is the top selection for underweighting sectors and the 4th-top choice for overweighting sectors—indicating that many investors are interested in simply maintaining market-like exposure.
Source: SPDR Americas Research, as of 05/07/2019
In sectors where investors do report taking bets, the focus tends to be on overweighting technology and health care—sectors characterized by high cash flow and strong balance sheet fundamentals. The financial sector is another bright spot where investors could be seeking a valuation opportunity.
A tempered optimism
In this environment where markets continue to rally, our Midyear Investor Survey does indicate that investors remain confident. However, some responses about portfolio positioning tell a story of more tempered optimism, with an emphasis on managing portfolio risk—either pairing back credit risk and favoring investment-grade, or not making specific country or sector allocations in favor of broader market beta. In addition to the data discussed above, diversification, keeping costs low, and protecting principal are reported as the top three investing considerations for our respondents. These are all indicative of a diversified long-term portfolio positioning mindset that is not seeking to chase returns at the moment, given how extended the market cycle has become.
1Bloomberg Finance L.P., as of 04/29/2019.
About the Survey
A total of 529 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 are in the forefront of their minds. The survey was fielded in May 2019. The respondents represent a variety of investment professional segments, holding a wide range of assets under management.
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.