Investors remain “unashamedly bullish” about the prospects for 2018, with high expectations for equities to continue surging over the next 12 months, according to a survey by Absolute Strategy Research (ASR).
The macro strategy research provider polled 229 asset allocators and multi-asset strategists from around the world, representing $6trn (€5trn) of assets. They were asked to give their probabilities for the movement of key asset classes and market variables over the coming 12 months.
Investors put the likelihood of equity prices being higher a year from now at 61%, supported by higher corporate earnings (74% probability) as opposed to higher valuations.
They showed high conviction in the probability of stocks trouncing bonds on a 12-month basis, rating this at 70%. Investors also believed equities will beat commodities (54% probability).
“We have been surprised to see that investors’ expectations of positive equity market returns have barely changed in the past year, despite the strong run in the asset class, and investors’ view that the global business cycle is unlikely to improve from here,” ASR said in its survey report.
“The risk in our opinion is that … the global economy fails to achieve the ‘escape velocity’ that is required to meet investors’ optimistic expectations”
– David Bowers, head of ASR research
Investors expectations of higher equity prices in 2018, assigned a 61% probability, was in line with December last year.
This view came after returns of around 20% in the past year and “sits uncomfortably” with investors becoming less confident about further advances in the business cycle, ASR said.
The probability of an improvement in global business confidence had declined significantly in investors’ eyes, from 58% in the fourth quarter of 2016 to 47% in the fourth quarter of 2017.
With the Federal Reserve continuing to normalise monetary policy, investors estimated the probability of higher 2-year and higher 10-year yields over the next 12 months at 76% and 69%, respectively.
“Investors do not believe this tightening will derail the US recovery with the risk of a higher US unemployment rate in 2018 at 40%,” ASR said.
Tail risks, too, remained largely off the radar. Surveyed investors estimated the probability of a global recession, a hard landing in China, or a bear market in US equities at 27%, 29%, and 39% respectively.
But there were challenges to the optimistic outlook. For example, investors saw the prevailing low equity volatility as unsustainable and put at 74% the probability of it being higher a year from now.
There was a growing indifference towards US corporate credit and there was also lower confidence about further improvements in the business cycle through 2018.
“Investors are waking up to the possibility that this could be as good as the the global business cycle gets,” said David Bowers, head of ASR’s research.
“The risk in our opinion is that the global economy disappoints at the same time as monetary conditions tighten, and that consequently the global economy fails to achieve the ‘escape velocity’ that is required to meet investors’ optimistic expectations,” he added.
The survey was carried out during 23 November and 6 December. Investors were asked how likely they think certain financial and economic events are to occur in the next 12 months. For each question respondents selected a probability, ranging from “very unlikely” to “very likely”, which is converted into a numerical probability, ranging from 10%-90%. The overall probability is an average of these responses.