We recently completed our annual year-end survey, gathering responses from over 600 clients about their investment outlooks and asset allocation plans for 2020. Here in Part 1 of our 2020 ETF Market Outlook Series, we explore key survey findings, which collectively indicate that investors are closely focused on controlling risk in the year ahead. Fueling this risk-oriented viewpoint is a challenging blend of global economic uncertainty, falling corporate profits, trade tensions and lingering memories of sizable drawdowns in 2018—all juxtaposed against year-to-date double-digit gains in global equity markets and record highs in US stocks.1
Investors’ top concerns for 2020: Unpredictable Macro Risk Events
Investors are feeling somewhat optimistic about prospects for US equity markets in 2020—but notably less enthusiastic than they felt earlier this year. Thirty-three percent of respondents said they believe that the S&P 500® Index will increase by more than 5% in 2020, and 33% said the benchmark index will be up between 1% and 5%. This shows more tempered optimism compared with our 2019 midyear survey results, in which the majority of respondents forecasted a 5%+ gain over the next 12-month period.
What’s behind the increasingly tepid expectations? Investors told us that their top concerns are:
- US political uncertainty ahead of the 2020 election
- US-China trade tensions
- A global economic recession
The chart below shows investors’ responses in aggregate. In our view, the top three concerns are notable for their exogenous, binary nature. Investors are less concerned about valuation and defaults; they’re more focused on trade tensions between the US and China, for example—an issue with an arguably binary outcome, in that trade dynamics can either become more hawkish or more dovish, with little foreseeable middle ground.
Portfolio construction plans: Taking a risk-oriented viewpoint
Investors’ top concerns appear to be directly reflected in their top portfolio construction goals for 2020, which are:
- Constructing balanced portfolios
- Managing downside risk
- Keeping investment costs (including trading costs) low
Investors’ top 2020 goal is to construct balanced portfolios, which was also their top goal for 2019. Many investors may feel that this year has been a flat circle: everything we have seen, or will see, we are going to see over and over again, including Brexit debates, trade tensions, unrest in the Middle East and US congressional inquiries. Similar to 2019, constructing balanced portfolios in 2020 will require balancing equity risk with a robust fixed income exposure to generate the total returns investors are seeking in our late-cycle economy. Keeping investment costs low will be vital to reaching total return objectives in 2020.
Asset allocation plans: Favoring a more defensive stance
The chart below tracks investors’ asset allocation plans. In several asset classes, we don’t observe an overwhelming consensus among investors; the difference between the percentage of investors who plan to increase their allocation versus decrease is relatively small. In emerging markets, for example, 32% of respondents plan to increase their allocation, while 26% plan to decrease.
We do see more conviction, however, in investors’ plans to be defensive. In investment-grade credit, for example, the differential is notable: 26% plan to increase, while just 8% plan to decrease. Similar defensive trends are evident in high-yield credit (9% increase vs. 34% decrease), cash (25% increase vs. 7% decrease) and gold (16% increase vs. 6% decrease). These defensive allocation plans are another reflection of investors’ risk-oriented viewpoint for 2020. Furthermore, there is a high preference to be broadly exposed and diversify country and region risk when allocating to non-US stocks, rather than selecting individual regions, such as Japan and Europe.
Sector exposures: Managing risk in a late-cycle economy
In order to provide absolute clarity on the conviction of our respondents, only responses of overweight or underweight were analyzed. As not all investors are sector rotators, a neutral weight was not plotted as we wanted to examine specific planned tilts or tactical allocations heading into 2020. And planed sector over-and underweights, as shown below, provide additional evidence of investors’ risk-oriented approach heading into 2020. Consider Health Care, for example: more than 60% of respondents indicate a preference to be overweight, revealing a strong defensive exposure in the current late-cycle environment. Health Care companies are typically noncyclical businesses, which has helped the sector historically outperform the broader market in six of seven US recessions by an average of 10%, and in eight of 11 slowdowns by an average of 5% on a cumulative basis since 1960.2
Investors’ overweight in Consumer Staples tells a similar story, as this sector also has historically performed well during economic slowdowns. Correspondingly, we see relatively few investors with heavy exposure to Energy and Materials—two sectors that are typically quite cyclical. Interestingly enough, the defensive-oriented Utilities sector ranked low. Perhaps this is a by proxy of the recent run-up in performance that has resulted in elevated valuations.
Stay tuned to SPDR® Blog, where in the coming weeks, we’ll publish our 2020 Market Outlook, including potential opportunities for the year ahead.
About the Survey
A total of 610 investment professionals completed State Street Global Advisors’ online year-end 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 October 2019. Respondents represented a variety of investment professional segments holding a wide range of assets under management.
1“S&P 500 hits fresh all-time high, boosted by strong earnings and US-China trade progress,” CNBC October 28, 2019.
2Sector Business Analysis, State Street Global Advisors, November 2018.
A term for the withdrawal of the United Kingdom from the European Union.
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.