Instos bracing for a stock market correction

An overwhelming majority of institutional investors believe that stock markets have peaked and fear a big correction is around the corner, according to according to a new survey by alternative assets information provider Preqin.

The alternative assets information provider conducted the survey in July. Of the 177 institutional investors polled, 74% believed equity markets are currently at their peak, compared to 56% a year earlier.

“Just 6% believe we are in an expansion phase, down from 21% that said so six months prior,” the data provider noted.

A general slowdown in the global economy and an escalation in trade tensions between the US and China have raised apprehensions that global stock markets, led by those in the US, are set for a correction.  

One prominent means of checking stock market’s over-exuberance is to assess the market capitalisation-to-GDP ratio. The global market capitalisation to GDP ratio peaked at 137% in 2007, and notched a fresh high of 154% in 2017, according to Bloomberg data. 

Meanwhile the US had a the ratio of over 148% by the end of 2018, according to the World Federation of Exchanges database. Only Switzerland and South Africa had a higher ratio.

Concerns about equity market altitude sickness are prompting more investors to seek out alternative assets such as private equity and real estate despite rising valuations in these sectors too, said Amy Bensted, head of data products at Preqin.

“Although pricing concerns in private capital continue – particularly in private equity and real estate, investors will be relying on these funds, and their proven long-term returns, to deliver during a downturn,” she said in the survey’s summary. 

Growing concern over equity valuations appears to include the most famous current investor – Warren Buffet, chief executive of US fund house Berkshire Hathaway. His firm held a record $122 billion in cash at the end of June, or about 60% of the portfolio of investments. It is only held a higher position once – before the 2008 financial crisis, according to Bloomberg.

Institutional investors, particularly ultra-long-only investors such as state and sovereign funds, have also been taking note – partially by favouring more allocations to alternative investments and private capital. This includes across Asia and in China, where rules have been changed to allow for more private equity investing. 

The ongoing interest of institutional investors in alternatives is partly a reflection of many institutional investors' belief that they will outperform in the coming 12 months, despite becoming more expensive as well. While a majority of Preqin’s survey respondents felt private equity and real estate investors believe assets are overvalued, only 17% and 19% respectively said they believe a correction in the sector is due in 2019. However, a majority felt a correction would fall due in 2020 or beyond.

The market uncertainty is also prompting investors to plan to maintain or increase their hedge fund investments with an aim to protect their overall portfolios from probable downsides, Preqin said. Almost a quarter of investors are planning to invest more into hedge funds in the next 12 months, compared to 16% of those surveyed at the same time last year.

That increase comes despite a majority of investors expecting a challenging environment for investment returns on their hedge fund investments, given the volatility in the market, the data provider added.