Investor sentiment

Four insights on the pandemic market and investor behavior

6月 14, 2020 - 6 分鐘的閱讀時間

After weathering a six-month stretch that saw markets drop from all-time highs to the worst losses in over a decade, only to climb back quickly to record single-day gains, financial professionals will closely monitor markets for signals that indicate that the quick market recovery is here to stay in the second half of 2020.

Results from the 2020 Natixis Global Survey of Financial Professionals show that despite high levels of concern about volatility and recession, respondents are not likely worried about the long-term effect on market performance. Conducted between March 15 and April 24, 2020, when pandemic volatility was at its highest, the survey of 2,700 financial professionals in 16 countries showed that even in the throes of market upheaval, they anticipated market losses to moderate.

Based on responses from a group of financial professionals with an average of 20 years’ industry experience that collectively runs $134.6 billion in client assets, survey data highlights four key observations on the pandemic market.

1. Volatility, recession top portfolio risks. Rates less of a concern.

Financial professionals’ risk concerns are more likely to reflect uncertainty about the post-coronavirus world than any underlying fundamental financial problems like those revealed by the 2008 Global Financial Crisis. Market volatility (69%), recession (67%), and geopolitical events are most frequently cited as portfolio risks.

Top Portfolio Risks for 2020

With volatility reaching highs not seen in years, it’s clear that investor sentiment is of paramount concern for financial professionals. So are the effects of shuttering the global economy, which weighs almost as much on their minds. All in, it demonstrates a dramatic shift in risk concerns since the start of the year.

Interest rates have ranked high on the list of portfolio risks across our surveys of professional investors over the past five years. Rate risks were clearly on the minds of institutional investors in our 2020 outlook survey, where they ranked it as their number-two risk concern. But with markets in crisis mode, new cuts from the US Federal Reserve Bank and the European Central Bank have actually helped to calm markets and stabilize returns.

“Interest rate risk placed higher in past surveys as investors worried that central banks would eventually have to normalize policy and begin raising rates,” said Natixis Investment Managers’ Head of Global Market Strategy, Dynamic Solutions, Esty Dwek. “In the midst of the current crisis, real yields have fallen, inflation expectations have cratered, and central banks are unlikely to raise rates for several years. So it’s little wonder that rate fears have subsided.”

2. Despite the uncertainty, optimistic forecasts looked more like 2018 than 2008.

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. Even then, they believed markets would continue to improve throughout the rest of the year. Forecasts of 2020 returns at that time called for only a -7.0% decline for the S&P 500¹ and -7.3% for the MSCI World Index.²

Estimates more closely resemble 2018 returns, when a fourth quarter spate of volatility resulted in a surprising -4.38% decline for the S&P and -8.2% decline for the MSCI World – a far cry from the S&P’s -38.5% decline and the MSCI’s -42.1% losses during the 2008 Global Financial Crisis.

Return Expectations from a few key markets

While optimistic on prospects globally, professionals in most countries are more pessimistic about performance in their home markets. Only those in the US (-3.6% projected for the S&P) and France (-5.6% projected for the CAC 40) believe their domestic markets will fare better. Professionals in Hong Kong, Italy and the UK are among the most negative on home market performance.

3. Market favors active management. Reveals limitations of passive funds.

Looking at a market disrupted by volatility and uncertainty, eight in ten financial professionals believe the environment favors active management.

In essence, professionals recognize that volatility generally results in greater dispersion of performance among securities.

In fact, dispersion of returns within the S&P 500 topped 15% in March and April 2020 – a rate that more than doubled the 6.6% the index has averaged monthly since the Global Financial Crisis.

S&P 500 Cross-Sectional Volatility

Source: Natixis Investment Strategies Group, Bloomberg, FactSet, January 1997 – April 2020. Standard deviation⁷ of S&P 500 constituents’ 1-month returns.

In a similar vein, financial professionals suggest that investors may be learning tough lessons about the limitations of passive investments as a result of the pandemic downturn.

Two-thirds say investors have a false sense of security about passive.
Seven in ten (72%) say investors were not aware of the risks of passive.

Research from the Natixis Center for investor Insight confirms these suspicions. Results from our 2019 Global Survey of Individual Investors⁸ show:

62% of investors worldwide forget passive investments like index funds have no built-in risk management. They think index funds are less risky.
64% of investors forget that whether it’s up or down, index funds deliver market performance. They mistakenly believe index funds will protect them on the downside.

With markets down substantially in 2020, investors may be feeling doubly surprised by losses on their first quarter statements.

4. High valuations, high emotions add up to a perfect storm for emotional decisions.

Despite markets like the S&P 500 fresh off all-time highs, financial professionals say the pandemic downturn has exposed a number of flaws hidden in the hyperbole. Half (51%) say the first quarter volatility revealed a market driven more by sentiment than by fundamentals. Almost the same number (47%) also say the markets were overvalued.

When it comes down to it, many see the market downturn as a lesson in behavioral finance, as 35% say the volatility demonstrates that pent-up investor anxiety was greater than the market thought. In their view, individual investors were simply not prepared for the volatility:

Two-thirds (67%) say investors are unprepared for a market downturn.
Three-quarters (75%) say investors forgot that an 11-year bull market was unprecedented.
Eight in ten (81%) say the bull market made investors complacent about risk.

Completing the conditions for a perfect storm of emotional decisions, three-quarters of financial professionals (76%) say investors don’t recognize risk until it’s already realized.

Considering the long-term business impacts

From managing portfolios to managing clients, financial professionals have a lot on their plates in 2020. The full findings of the 2020 Natixis Global Survey of Financial Professionals, slated for release later in June, will offer insight on how these professionals will respond to the challenge on all fronts: investment strategy, practice management, and client servicing and education.

About the Survey

Natixis Investment Managers, Global Survey of Financial Professionals, conducted by CoreData Research in March-April 2020. Survey included 2,700 financial professionals across 16 countries.

¹ S&P 500^® Index is a widely recognized measure of US stock market performance. It is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation, among other factors. It also measures the performance of the large-cap segment of the US equities market.

² MSCI World Index (Net) is an unmanaged index that is designed to measure the equity market performance of developed markets. It is composed of common stocks of companies representative of the market structure of developed market countries in North America, Europe, and the Asia/Pacific Region. The index is calculated without dividends, with net or with gross dividends reinvested, in both US dollars and local currencies.

³ The French stock market index that tracks the 40 largest French stocks based on market capitalization on the Paris Bourse (stock exchange).

⁴ A market capitalization-weighted index of 40 of the largest companies that trade on the Hong Kong Exchange. The Hang Seng Index is maintained by a subsidiary of Hang Seng Bank, and has been published since 1969. The index aims to capture the leadership of the Hong Kong exchange, and covers approximately 65% of its total market capitalization. The Hang Seng members are also classified into one of four sub-indexes based on the main lines of business including commerce and industry, finance, utilities and properties.

⁵ The FTSE MIB (Milano Italia Borsa) Index is a major stock market index which tracks the performance of 40 leading and most liquid companies listed on the Borsa Italiana. It is a free floating, capitalization-weighted index.

⁶ The FTSE 100 Index is one of the world’s most recognized indices and accounts for 7.8% of the world’s equity market capitalization. It represents the performance of the 100 largest blue chip companies listed on the London Stock Exchange, which meet the FTSE’s size and liquidity screening. The index represents approximately 85.2% of the UK’s market and is currently used as the basis for a wealth of financial products available on the London Stock Exchange, National Stock Exchange of India and other institutions globally.

⁷ Standard deviation is a statistical measure that sheds light on historical volatility.

⁸Natixis Investment Managers Global Survey of Individual Investors, conducted by CoreData Research in February and March 2019. Survey included 9,100 investors in 25 countries.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of May 2020 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

All investing involves risk, including the risk of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

Unlike passive investments, there are no indexes that an active investment attempts to track or replicate. Thus, the ability of an active investment to achieve its objectives will depend on the effectiveness of the investment manager.

The data shown represents the opinion of those surveyed, and may change based on market and other conditions. It should not be construed as investment advice.

You cannot invest directly in an index. Indexes are not investments, do not incur fees and expenses and are not professionally managed.

Volatility management techniques may result in periods of loss and underperformance, may limit the Fund’s ability to participate in rising markets and may increase transaction costs.

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