Most advisers expect year-end returns more like 2018 than 2008: survey

Financial professionals, including investment advisers, wealth managers, brokers and financial planners, expect US stock returns to climb back from steep losses to finish the year down just 3.6%, according to findings of a comprehensive survey published today by Natixis Investment Managers.

Despite seeing losses as steep as -34% within the first few weeks of the crisis, financial professionals subsequenty saw losses moderate to as little as -10% by the end of April.

The survey showed that 51% of financial professionals globally saw initial volatility caused by the coronavirus crisis as driven more by sentiment than by fundamentals. Optimistic the market will continue to right itself in the second half of the year, financial professionals' main concern is the uncertainty of what happens next, including how investors handle it.

Between 16 March and 24 April Natixis surveyed 2,700 financial professionals in 16 countries, including 300 financial professionals in the UK. The company found that, globally, respondents forecast a loss of 7% for the S&P 500 and a loss of 7.3% for the MSCI World Index at year end.

Their 2020 return expectations more closely resemble the modest declines seen in 20181 than in 2008, when the S&P plunged 37% and the MSCI posted a loss of 40.33%. In the UK market, expectations are in line with the global average, but elsewhere, financial professionals are notably more pessimistic about stock performance in their own markets, with those in Hong Kong, Australia, Italy and Germany all projecting double digit losses for the year.

Ongoing volatility remains the top risk to portfolio performance and market outlook. Two-thirds (69%) of professionals globally cite volatility as a top concern, followed closely by recession fears (67%).

For respondents in the UK, volatility presents even more concern, with almost four fifths (78%) citing it as a top risk. Almost half (47%) of respondents globally say uncertainty surrounding geopolitical events pose a risk to their portfolios, even higher for the UK, at 60%.

In a dramatic shift in risk concerns from previous years surveys, a fifth of respondents (19%) expressed concern about low yields, while liquidity issues were also cited by 17% of those surveyed.

"With economies slowly reopening, financial advisors around the world are bullish on recovery," said Darren Pilbeam, managing director, UK retail and wholesale sales at Natixis Investment Managers. "But they are also focused on how to shield clients from the volatility they expect to come with it. The crisis has been a perfect storm for emotional investment decision-making, and with the downturn exposing the limitations of passive investing, the vast majority of advisors are looking to active management in

the current environment."

Resetting expectations
After a 12-year run in which the S&P 500 delivered average annual returns of nearly 13% (according to data from Morningstar), and fresh off record highs in January and February, the magnitude of losses caused by the covid-19 pandemic was swift and stunning.

In particular, the survey found:

• 67% of financial professionals think individual investors were unprepared for a market downturn (65% in the UK)

• 75% suspect investors forgot that the longevity of the bull market was unprecedented, not the norm, historically (78 % in the UK)

• 76% think individual investors, in general, struggle to understand their own risk tolerance, and the same number say clients don't actually recognise risk until it's been realized (68% in the UK)

"The market downturn - and expected recovery - serves as a lesson in behavioural finance, even if learned the hard way through real losses and missed goals," said Dave Goodsell, executive director of Natixis' Center for Investor Insight.

"Investors got a glimpse of what risk looks like again, and it's a teachable moment. Financial professionals can show their value by talking with clients in real terms about risk and return expectations, helping them build resilient portfolios and how to keep emotions in check during market swings."

Eight in 10 financial professionals (79%) believe the current environment is one that favours active management. For those who embrace volatility as a potential buying and rebalancing opportunity, it's another teachable moment for portfolio positioning and active management.

Almost seven in 10 advisers globally agree investors have a false sense of security in passive investments (68%) and don't understand of the risks of investing in them (72%). These figures are broadly reflected in the UK, where six in ten agree passive investments can give a false sense of security and 58% think investors don't understand the associated risks.

Financial professionals are responding to new challenges managing client investments, expectations and behaviour. Under regulatory, industry and market pressure, their approach is changing on all fronts: investment strategy, client servicing, practice management and education. In a series of upcoming reports, the Natixis Center for Investor Insight will explore in-depth how financial professionals are adapting.

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