About a decade of stock market growth is likely to continue in 2018, but some institutional investors are starting to prepare for the end of the bull market, according to a new survey of institutional investors released at a conference in Manhattan on Tuesday.
Institutional investors expect the stock market to continue rising, but they are wary and examining alternative investment strategies because they see potential threats to the bull market, according to the Natixis Investment Managers survey.
“Investors are facing unprecedented challenges as central banks unwind the easy money policies that have dominated the markets since the financial crisis and prepare for the first challenging bond market in more than a generation,” says David Giunta, CEO for the U.S. and Canada at Natixis Investment Managers.
Why else are managers so careful as the stock market keeps reaching new highs? Investors are worried that volatility has hardly been a factor in recent markets, according to the survey.
“Seventy-two percent of institutional investors say they are surprised that volatility has been so low for so long, and most don’t think the trend will continue into 2018,” according to the survey. Most respondents said both the stock and bond markets will be more volatile next year.
A significant minority of respondents also said they are worried about potential bubbles. “Thirty percent of institutions think there is a stock market bubble, and 42 percent, including 60 percent in the U.K., think there is a bubble in the bond market,” the survey reported. The majority of the managers, 64 percent, also say the bitcoin market is a bubble.
The top three portfolio concerns, managers said, are interest rates, 62 percent; price volatility spikes, 53 percent; and liquidity, 32 percent.
How can an investor defend against these potential problems? Will diversification help?
Sixty percent said fixed income no longer provides adequate diversification. Numerous managers are now using alternate assets. The typical portfolio allocation, according to the survey, has 37 percent in stocks, 34 percent in bonds, 21 percent in alternative assets and five percent in cash.
A majority of managers, 59 percent, also said passive investing “artificially suppresses” volatility. They said that this distorts stock prices and increases systemic risk, according to the survey.
“By embracing alternative strategies such as infrastructure and the private markets,” added Robert Hussey, executive vice president of the Institutional Services Group at Natixis Investment Managers, “institutions are still confident they can weather the obstacles that lie ahead and fulfill their mandates.”