31 August 2018
Challenges Ahead Extended Bull Market Has Led To Investor Complacency
After a banner year in the markets, volatility is now creating a tumultuous environment in which investors can make costly mistakes. Financial professionals are exposed to numerous risks to their investment performance in 2018, from growing geopolitical uncertainty to rising interest rates to inflation, however managing the emotional reactions of clients could be their greatest challenge, according to research released by Natixis Investment Managers. Natixis’ Center surveyed 300 U.S. financial professionals—among them, wirehouse advisors, registered investment advisors and independent brokers and dealers—about market challenges and how they are positioning client portfolios. According to the findings, few respondents believe that investors are ready for a return to more normal market ebbs and flows and may make what advisors foresee to be their biggest mistake: Emotional investment decisions. Indeed, nearly half (46 percent) of professionals reported that their clients reacted emotionally to recent market movements. Moreover, eight in 10 (82 percent) believe the prolonged bull market has made investors complacent about risk, and they fear this could translate into moves driven by emotion and panic once volatility strikes again. As financial advisors strive to grow assets under management by their own goal of 14 percent over the next 12 months, they see several potential roadblocks. Among the survey’s findings:
• Threats to investment performance. Financial advisors see geopolitical events as the biggest potential threat to the markets. Sixty-eight percent say it would negatively affect overall investment performance, followed by interest rate increases (66 percent), rising volatility (57 percent) asset bubbles (54 percent) the low yield environment (47 percent), unwinding of quantitative easing (46 percent) and regulation (43 percent).
• Impact of short-term rate increase. Advisors say an increase in central bank short-term interest rates will adversely affect bond volatility (74 percent), the housing market (74 percent), the credit market (65 percent), overall market volatility (61 percent) and stock values (52 percent).
• Portfolio risks. Top risk concerns include interest rate hikes (59 percent), asset-price volatility spikes (55 percent) and inflation (40 percent). Notably, financial advisors already are acting in response to rising rates with half saying they are positioning client portfolios for rising rates by managing bond durations.
• Concerns about bubbles. Advisors show the most concern for crypto-currencies, and after a considerable run up in 2017, nearly three-quarters (74 percent) see the potential for this bubble to burst in 2018. They also believe asset bubbles exist within the bond market (25 percent), real estate (24 percent), the tech sector (21 percent) and the stock market (18 percent). “After an exceptional year in 2017, volatility is back, and investors are feeling as uncertain as the markets,” says David Giunta, CEO for the U.S. and Canada at Natixis Investment Managers. “Our research shows investors often make decisions based on emotions, so it’s more important than ever for advisors to fortify close relationships with their clients to help them put their emotions aside, and consider active portfolio design approaches that could be better suited to weather today’s markets.” The research also examines trends in active management, alternative investments, and client education.
To read the full white paper, Meeting of the Mind, please visit www.natixis.com.
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