Coronavirus - COVID-19June 17, 2020

Roller Coaster Markets Don’t Dampen Investor Optimism

Despite whipsaw market volatility, financial professionals expect only modest declines in 2020.

Reported by Michael Katz

Not even the apex of the COVID-19 pandemic was enough to scare financial advisers into fearing for the fate of the markets.

Between March 16 and April 24, when the pandemic was tearing across the globe and much of the world was under lockdown orders to shelter in place, Natixis Investment Managers surveyed 2,700 financial professionals in 16 countries, including a pool of 300 wealth managers, investment advisers, and brokers in the United States.

Despite the panic and uncertainty gripping most of the world at the time, and the comparisons to the Great Recession, the survey’s respondents said they felt 2020 would turn out to be less like 2008 and more like 2018. Despite seeing losses as high as 34% within the first few weeks of the crisis, the financial professionals surveyed forecast a loss of only 7% for the S&P 500 and 7.3% for the MSCI World Index by year’s end. By comparison, the S&P tumbled 37% and the MSCI plunged 40.33% in 2008.

The survey respondents’ outlook was more optimistic for the US than elsewhere, as financial professionals were significantly more pessimistic about stock performance in Hong Kong, Australia, Italy, and Germany, where they expect double-digit losses for the year.

One of the reasons for the optimism regarding the US markets was the respondents’ faith that the economic relief packages passed by Congress would have their desired effect.

“Advisers in the US seem to be giving an initial vote of confidence to the swift and dramatic actions taken by Fed and Congress in response to the pandemic, as well as the resiliency of the US economy,” David Giunta, CEO for the US at Natixis Investment Managers, said in a statement.

And the volatility of the markets indicates that investors believe it’s time to take a hands-on approach to investing, as 81% of the financial professionals surveyed said they believe the current environment favors active management over passive management. Additionally, 70% said they believe investors have a false sense of security in passive investments, while 78% said they don’t believe investors understand the risks of investing passively.

“The dramatic rise in volatility underscores the important role that active managers and financial advisers play in helping their clients navigate uncertainty, capitalize on opportunities, and remain focused on their long-term investment goals during these unprecedented markets,” Giunta said.

According to the survey, volatility and the threat of a recession are seen as the main risks to portfolio performance and the market’s outlook as 65% of US respondents cite volatility as a top concern, while 64% say they are most worried about a recession. Some 43% say uncertainty surrounding geopolitical events poses a risk to their portfolios, while 25% expect the US presidential election to be a factor. And in a major shift away from the risk concerns cited in previous years’ surveys, only 22% said they were concerned about low yields.

The responses to the survey seem particularly optimistic considering that 46% of respondents said they felt that markets were already overvalued at the time, while 92% said they believe the prolonged bull market had made investors generally complacent about risk. And as long as the markets are rising, 48% of respondents say their clients resist portfolio rebalancing.

“The market downturn—and expected recovery—serves as a lesson in behavioral finance, even if learned the hard way through real losses and missed goals,” said Dave Goodsell, executive director of Natixis’ Center for Investor Insight. “Financial professionals can show their value by talking with clients in real terms about risk and return expectations, helping them build resilient portfolios, and showing them how to keep emotions in check during market swings.”