The majority of the world's wealthiest investors are expecting a big stock sell off in 2020, according to a new survey released by UBS Wealth Management.
Released on November 12, 2019, the survey took the opinions of more than 3,400 investors with at least $1 million in investable assets each. Of the participants, 55% said they expected a 'significant drop in the markets' in 2020.
"Investors see reasons to be cautious in the new year," said UBS Global Wealth Management's client strategy office. "Two in three global investors believe markets now are driven more by geopolitical events than business fundamentals such as profitability, revenue and growth potential."
So what did the survey find? And what trading opportunities could this mean for the rest of 2019 and 2020? Keep reading to find out!
Nearly 80% of investors expect more volatility
Along with getting investors' outlooks for 2020, the UBS survey also asked them for their thoughts on volatility, investment security and more.
They found that 79% of high net worth investors expect higher market volatility, and almost 3 in 4 investors believe the investment environment is more challenging than it was five years ago. 58% of investors feel less in control of their portfolios' performance than they used to.
All of this led 52% of investors to report that they were unsure of whether now is a good time to invest.
Consequently, respondents revealed that they are currently holding 25% of their portfolios in cash, which is far higher than the 5% that UBS recommends, and 60% are considering increasing their cash levels further.
In times of market volatility, having cash on hand is often seen as a safer option. Wealthy investors holding so much of their portfolios in cash, when the stock market has historically provided much higher returns, is a significant red flag.
Economic concerns have geopolitical
What is causing such concern among the world's wealthiest? According to UBS, two in three investors believe markets now are driven more by geopolitical events than business fundamentals such as profitability, revenue and growth potential.
Consequently, current geopolitical events are causing more investors to follow more risk-averse investment strategies.
The most significant areas of concern were:
- The ongoing US-China trade conflict (44% of investors believed this would affect their portfolios in 2020)
- Their local political environment (41% expected that this would affect their portfolios' performance)
- The 2020 US Presidential election (37% of investors believed this would have an impact)
Survey follows stock markets all-time highs
For those who aren't among the world's ultra-wealthy, this judgement might come as a surprise, with both the Dow Jones Industrial Average and S&P 500 being up more than 3% in the last month, and the S&P 500 hitting all-time highs on November 12.
Gains were led by strong performance in Disney and Facebook shares. Disney shares rose more than 1% following the launch of its Disney+ streaming service, while Facebook rose 2.6% after announcing its new payments tool.
These gains were further bolstered following comments from President Donald Trump, who hinted at Chinese enthusiasm for a trade deal.
Source: Admiral Markets MT5 SP500, CFD Daily chart (between October 2, 2018 and November 13, 2019). Accessed: November 13, 2019, at 3:00pm EET - Please note: Past performance is not a reliable indicator of future results, or future performance.
So how can there be concerns about a crash, just when the market has hit its peak?
One part might be the timing - the UBS Survey was conducted between August 2019 and October 2019, when the market was experiencing much higher levels of volatility. However, some analysts also believe that this is simply the peak before a large correction.
Is the market due for a 25% correction?
According to Fortune journalise Shawn Tully, while prices for US large cap stocks are at an all time high, so too are earnings.
Historically, this pattern is concerning, as the last time we saw this was in Q2 of 2007. The profits of the S&P 500 hit a then all-time high of USD84.92, and then collapsed in the financial crisis. The index didn't recover those levels until early 2013, and didn't reach a new peak until September 2014.
2019 has demonstrated the beginnings of a similar pattern. The S&P 500 hit $135.27 in Q2, with the estimated number for Q3 being $133.95. From Q4 2014 to Q3 2019, the S&P's earnings per earnings per share rose 2.7% a year (adjusted for inflation), beating the overall economy by a margin of 19%.
This year's S&P operating profits have averaged 11.3% - their best performance in a decade, and 1.8% above the average of 9.5% since 2010. Corporate profits account for 9.8% of GDP, which is significantly higher than the norm of 7.5%. All of this doesn't point to a pattern of higher highs and higher lows - it points to an exceptionally high peak.
At the same time, the value of the S&P Index has risen much faster than the profits of the shares contained within. At the peak of profits in 2007, investors were getting a return of $5.60 for every $100 they spent on an index of S&P stocks. At the peak in 2014, they were getting a return of $5.40. Today, the S&P's price-to-earnings ratio is 23, which means investors are getting a return of $4.30 on every $100 invested.
That is 23% less than at the 2007 earnings peak, and 20% below the number at the apex of five years ago.
The danger is that investors will start to demand more, and the likelihood of a 2020 earnings explosion delivering on these demands is low, given that profits are already at extreme highs. This leaves little room to grow, and a lot of room to fall - similar to what we saw in 2007 and 2008.
There is a silver lining…
Fortunately, not all news is negative.
The first thing savvy traders should keep in mind is that volatility creates opportunity. With instruments like the SP500 CFD and the DJI30 CFD giving you the opportunity to trade both long and short, it's possible to profit in both rising and falling markets. Ultimately, just because the market crashes it doesn't mean your portfolio needs to - it's all about how you trade it.
While volatility does create opportunities for traders, though, it's also important to keep in mind that these tend to be times of higher risk, so it's also important to manage your risk carefully.
Other than that, while the majority of UBS's investors felt that there were risks facing the market in the coming months, 70% of investors felt positive about their portfolio returns over the next decade.
They saw a number of "mega-trends" influencing the market, that could lead to new opportunities, particularly in the technology, healthcare and energy sectors. 88% of investors reported that they were interested in aligning their portfolios with these trends.
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