Institutional investors predict the volatility that hit global markets in the fourth quarter will continue into the new year and expect the U.S. bull market to end soon, a Natixis Investment Managers survey released Wednesday said.
Among the 500 global institutional investors surveyed, nearly two-thirds — 65% — believe the bull market will end in 2019, while 70% expect the next global financial crisis to hit within the next five years. But even as they expect turbulent times, six out of 10 investors say they feel prepared to handle the risks in 2019.
"Our research shows institutional investors are already positioned for the potential market turbulence on the horizon," said David Giunta, CEO for the U.S. and Canada at Natixis Investment Managers, in a news release announcing the survey results. "For these sophisticated investors, actively managed strategies and alternative investments are their tools of choice to help optimize their portfolios for the challenges ahead."
Other findings show 79% of investors believe the current market environment favors active management, and average allocations to active strategies grew to 70% this year, up from 64% in 2015. In addition, 84% of institutions expect more volatility in the stock market, while two-thirds expect to see more volatility within the bond market.
The survey also found investors see geopolitical disruptions and trade disputes as the biggest potential threats to markets in 2019, with rising interest rates posing the greatest risk to portfolios.
Institutional investors said their organization's current long-term target return is an average 6.7%, with 77% believing their return assumption to be realistic. More than half (56%) expect to keep their assumed rate of return unchanged in 2019, although 35% plan to lower it, and 9% expect to raise it.
Investors foresee minimal changes to their portfolio allocations in 2019, reducing their equity allocations to 36% from 38% on average while increasing fixed income to 38% from 37%, and cash to 6% from 5%. They expect no change in their alternatives allocation, at 18%.
Among the biggest moves within classes, 41% of institutional investors expect to decrease exposure to U.S. equities, while 36% expect to increase exposure to infrastructure.
Eight in 10 (79%) institutional investors agree the market environment in 2019 likely will favor active management, which is why investors continue to increase their use of active strategies. Current allocations are split 70% active and 30% passive, up from 64% active with 36% passive in 2015.
Investors regard geopolitics as the biggest threat to performance, with 77% of investors seeing such geopolitical disruptions as North Korea and Brexit as having a negative impact on investment performance in 2019, followed by trade disputes (74%), the unwinding of quantitative easing (65%), interest rate increases (56%) and market volatility (54%).
The report based on the survey results, "Keep Calm and Invest On," is available on Natixis' website.