Investors’ skepticism is increasing along with the relentless bull market in stocks.
Global equities will fall by at least 10 percent in the coming 18 months, according to 71 percent of institutional investors who were polled in by Managing Partners Group. The survey, released Thursday, was conducted among 54 institutional investors globally in December.
Many portfolio managers recognize nervousness in investor sentiment towards equities. James Clunie, Jupiter Asset Management’s head of strategy for absolute return, says his team has been identifying “lots of short ideas” for stocks they consider overpriced due to factors such as poor earnings or overly aggressive accounting.
“For about two years, we have been of the mind-set, that this stuff could fall,” Clunie said. “The way we are positioned means that if markets were to fall, that would be helpful for the fund.”
The Managing Partners Group survey found that 32 percent of investors expect markets will fall by as much as 30 percent. Only 12 percent expect there will be “no correction.” The findings follow a Bank of America Merrill Lynch report in August that said 46 percent of the 200 fund managers it surveyed believed equity markets were overvalued — a record high for the firm’s monthly poll.
The Dow Jones Industrial Average rose beyond 25000 for the first time on Thursday, the latest signal of the aging bull market.
[II Deep Dive: Survey: Nearly Half of Fund Managers Say Markets Overvalued]
Clunie said he is now shorting so-called glamour stocks, or companies that are popular because of their innovation or future potential. Any downturn would leave these stocks vulnerable because value investors wouldn’t be interested in buying them when the current holders want to sell, he said.
Fund managers with a cautious view on equities say that stock specific traits are becoming increasingly important rather than the overall level of markets.
“I am sure there will be a correction,” said Ali Miremadi, an investment director at GAM and a member of the investment committee for the Wadham College endowment of Oxford University. “But, I’m not sure it’s the best use of time to say, just because markets have gone up for a long time, that one should be nervous.”
Miremadi said he recently attended a dinner held by a large U.S. broker and was surprised to hear that most delegates were extremely bearish on the global equities outlook. On returning to the office, he reached out to a major investment bank who advised that prime broker cash levels were low, indicating that investors remain fully invested.
“Implied volatility has been very low for a very protracted period of time,” Miremadi said. “We are currently in a very unusual period.”
Schroders’ chief investment officer of global equities, Alex Tedder, said he is “cognizant of potential risks” and recognized the potential for “increased volatility” in his 2018 outlook, published in December.
Tedder suggests that investors may be underestimating the impact of future rate rises or changes to central banks’ monetary policies. He said that company borrowing since the financial crisis has supported stock prices, but may not be “sustainable over the medium term” if rates rise.