Pragmatism is the new watchword for investors globally, with 70% stating they will chase returns, not asset classes, finds a survey released by CREATE-Research and commissioned by Principal Global Investors.
While two-thirds of respondents remain favourably disposed to equities, they also believe that investing today is about finding what works in a world of near-zero interest rates. This quest for returns is likely to increase demand for defensive stocks at a time when equity risk premiums remain high and volatile and the idea of a “risk free” asset is sidelined at today’s bond valuations.
“The revived interest in equities is being driven by a rebalancing act. Investors are recognizing that future returns for most asset classes will be much lower than in the past but they are also conscious of missing what may be a once-in-a-generation bull market,” says Professor Amin Rajan, CEO of CREATE-Research and the author of the report. “The result will be a ‘bondification’ of equities, as investors chase stocks with good dividends, less debt, strong proving power, free cash flow and a high return on equity.”
Read: Endowments, foundations still investing in bonds
The report, Pragmatism Presides, Equities and Opportunism Rise, seeks to address two fundamental questions: what is the latest thinking on the cult of equity and the notion of equity risk premium in today’s environment of artificially suppressed interest rates; and what asset classes are likely to be favored by different investor groups over the next three years.
“Not all equities are expected to be equally favoured by investors over the next three years—but a common thread is expected to be the ‘bondification’ of equities,” says Barb McKenzie, chief operating officer at Principal Global Investors. “This means they will favour quality companies with defensive features like good dividends, less debt, strong pricing power, free cash flow and higher return on equity. Such stocks typically gain more by losing less and outperform over full cycles.”
Key findings include:
Pragmatism will drive investors’ appetite for equities
- 79% of respondents don’t believe the cult of equity is dying, with only 4% believing the opposite;
- the support for equities varies by region, with North America (88%), Asia (81%) and Europe (79%) leading the pack; and
- the revival of interest in equities will be tempered by one key concern—63% of respondents expect equities to remain volatile.
Read: Institutional investors turning to smart beta ETFs
Over the next three years:
- 65% of investors think equities will remain attractive while yields are low;
- one in two respondents believe there will be a rotation from bonds to equities;
- almost 30% of investors believe pension plans will increase their allocation to equities—relying on equities to plug their deficits;
- 70% of survey respondents believe that over the next three years, investors will chase returns, not asset classes;
- investors expect the highest returns (7.5%) to come from private equity; and
- other highly rated asset classes include alternative credit (7%), emerging market equities (7%), small cap equities (6.5%) and global equities (5.5%).
Asset prices will be driven by:
- slower and uneven growth in the global economy (83%);
- negative fallout from the prospective rate-hike cycle in the U.S. (55%); and
- continued downward pressure on rates from the start of quantitative easing in the eurozone (54%).
Read: Global equities drive pension returns
“Investors are being practical—they recognize it’s not possible to achieve consistent returns by trying to time the market,” says Julia Lawler, senior executive director of multi-asset allocation at Principal Global Investors. “With interest rates being at historic lows and nearly 70% of the world’s investable assets being held by retirees or near-retirees, asset allocation decisions will no longer follow the traditional models.”
The findings are based on a survey of more than 700 pension plans, sovereign wealth funds, asset managers, pension consultants and fund buyers across 29 fund jurisdictions, with a combined assets under management of US$26.8 trillion.