Financial professionals, including investment advisers, wealth managers, broker/dealers, and financial planners, expect US stock returns to climb back from steep losses to finish the year down just 3.6%, according to findings of a survey published by Natixis Investment Managers. Despite seeing losses as high as -34% within the first few weeks of the crisis, financial professionals saw losses moderate to as little as -10% by the end of April.
The survey showed that 51% of financial professionals globally saw initial volatility caused by the coronavirus crisis as driven more by sentiment than by fundamentals. Optimistic the market will continue to right itself in the second half of the year, financial professionals’ main concern is the uncertainty of what happens next, including how investors handle it.
Between March 16 and April 24, 2020, Natixis surveyed 2,700 financial professionals in 16 countries, including 150 financial professionals in Mexico, and found that, globally, respondents forecast a loss of 7% for the S&P 500 and a loss of 7.3% for the MSCI World Index at year end. Their 2020 return expectations more closely resemble the modest declines seen in 2018 than in 2008, when the S&P plunged 37% and the MSCI posted a loss of 40.33%. In the US market, the outlook is more optimistic, but elsewhere, financial professionals are notably more pessimistic about stock performance in their own markets, with those in Hong Kong, Australia and Germany all projecting double digit losses for the year.
Ongoing volatility remains the top risk to portfolio performance and market outlook. Two-thirds (69%) of professionals globally cite volatility as a top concern, followed closely by recession fears (67%). Almost half (47%) say uncertainty surrounding geopolitical events poses a risk to their portfolios. In a dramatic shift in risk concerns from previous years surveys, a fifth of respondents (19%) expressed concern about low yields, while liquidity issues were also cited by 17% of those surveyed.
“With economies slowly reopening and global tensions easing, financial advisors around the world are bullish on recovery,” said Mauricio Giordano, Country Head, Mexico at Natixis Investment Managers. “But they are also focused on how to shield clients from the volatility they expect to come with it. The crisis has been a perfect storm for emotional investment decision-making, and with the downturn exposing the limitations of passive investing, the vast majority of advisors are looking to active management in the current environment.
Resetting expectations: Hard lessons and teachable moments
After a 12-year run in which the S&P 500 delivered average annual returns of nearly 13%, and fresh off record highs in January and February, the magnitude of losses caused by the coronavirus pandemic was swift and stunning. Never mind that nearly half of financial professionals (47%) agree that markets were overvalued at the time; eight in 10 (81%) believe the prolonged bull market had made investors generally complacent about risk. And as long as the markets are up, 49% of respondents say their clients resist portfolio rebalancing.
The survey found:
- 67% of financial professionals think individual investors were unprepared for a market downturn (63% in Mexico)
- 75% (72% in Mexico), suspect investors forgot that the longevity of the bull market was unprecedented, not the norm, historically
- 76% -67% in our country- think individual investors, in general, struggle to understand their own risk tolerance, and the same number say clients don’t actually recognise risk until it’s been realized
“The market downturn – and expected recovery – serves as a lesson in behavioural finance, even if learned the hard way through real losses and missed goals,” said Dave Goodsell, Executive Director of Natixis’ Center for Investor Insight. “Investors got a glimpse of what risk looks like again, and it’s a teachable moment. Financial professionals can show their value by talking with clients in real terms about risk and return expectations, helping them build resilient portfolios and how to keep emotions in check during market swings.”
Nearly eight in 10 financial professionals (79%) globally and in Mexico, believe the current environment is one that favours active management. For those who embrace volatility as a potential buying and rebalancing opportunity, it’s another teachable moment for portfolio positioning and active management. Almost seven in 10 advisers, both global and in Mexico, agree investors have a false sense of security in passive investments (68%) and don’t understand of the risks of investing in them (72%).
Financial professionals are responding to new challenges managing client investments, expectations and behaviour. Under regulatory, industry and market pressure, their approach is changing on all fronts: investment strategy, client servicing, practice management and education. In a series of upcoming reports, the Natixis Center for Investor Insight will explore in-depth how financial professionals are adapting.
For Clara Suarez
For Funds Society, Madrid