Portfolio managers and analysts are markedly more pessimistic about the markets than they were at this time last year, according to Boston Consulting Group’s annual survey of investor sentiment, released Tuesday.
The consulting firm polled 260 people, of which approximately 80 percent were portfolio managers. The remaining 20 percent were buy- or sell-side analysts. About half of those surveyed focused on the U.S., with the remainder focused on Europe and elsewhere.
Seventy-three percent of the survey respondents expect a recession in the next 24 months, up from 53 percent last year, according to the survey.
Approximately two-thirds of the self-described bearish investors think equities are overvalued, while nearly one-quarter pointed to global trade worries as the source of their pessimism. One in four respondents said they are bearish or extremely bearish about the markets over the next 12 months — up from one in five a year ago.
“Many investors said that they are responding to the looming economic downturn by taking a more defensive, value-oriented approach to their investment decisions,” wrote the authors of the report, entitled Investors Brace for a Downturn and Look to the Long Term. “To stand out from the pack and allay investors’ concerns, companies must take the right steps to prepare for and ultimately withstand significant economic headwinds without sacrificing long-term value creation.”
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Some 28 percent of respondents who identified as bearish said they are worried about growth in China, while 23 percent are concerned about public-sector debt and spending and 20 percent are worried about the effect of Brexit on economic development in Europe.
“These responses highlight the great extent to which fundamental macroeconomic developments influence investors’ expectations,” the authors wrote.
Only 33 percent of respondents were bullish or extremely bullish about the next year in the markets. That’s down from 46 percent last year.
Expectations of total shareholder returns are at historic lows. Survey respondents said they expect average annual total returns to be 5.6 percent over the next three years. Participants said 4.3 percent of the returns will come from earnings growth, 2.1 from dividends, and 1.2 percent from share buybacks. According to BCG, that means investors expect a notable 2 percent average annual decline in valuation multiples for the three-year period.
Investors aren’t sitting out the markets, however. BCG found that 43 percent are more focused on value and 37 percent are taking longer and being more deliberate about their investment decisions.
When it comes to investing for the long term, it’s a mixed bag. Eight-two percent of investors say they want companies to focus on long-term results. But companies might not be rewarded for their long-term planning. That’s because one-third of investors have shortened the time period for holding their investments. Only 16 percent said they would keep securities longer.
Even so, investors have ideas for the companies they own or want to own. According to the survey, 64 percent of investors say their top option for companies to use their capital and cash is for organic investments. Only 39 percent wanted companies to engage in M&A, down from 48 percent last year. A sizeable percent of investors (21 percent in 2018 versus 11 percent in 2017) want companies to build up cash on their balance sheet and even retire debt (32 percent versus 26 percent last year).
The consulting firm, however, sounded a warning about holding cash.
“While building up cash balances to prepare for possible headwinds has gained importance, companies should be aware that high cash balances might attract the attention of activist investors,” wrote the authors.