Investors are continuing to buy developed and emerging market equities despite overvalued prices and distinctive risks, warns State Street Global Advisors (SSGA).
In a research report, compiled by Longitude Research, SSGA found that investors are increasing their risk appetite due to the pressure to meet return expectations and the lack of yield offered by alternative asset classes.
The report – which canvassed 420 global executives – found there was a continued push into equities in the six months leading up to January 2015.
Approximately 63 per cent of global investors increased their allocation to developed market equities in that period.
In terms of emerging market equities, 48 per cent of global investors and 51 per cent of Asia-Pacific investors continued to buy the asset class.
SSGA Investment Solutions Group head of Asia Pacific, Mark Wills, said investors are “facing a difficult balancing act”.
“While many are concerned about a potential downturn and would prefer to reduce their equities exposure, they need to hold equities if they’re going to have any chance of meeting their long-term return expectations,” Mr Wills said.
“But their confidence in being able to weather a sharp correction is potentially misplaced."
Mr Wills said diversification strategies have limitations in preventing significant capital losses.
The report found that 57 per cent of global investors, particularly those in the Asia Pacific, expect developed markets to contract between 10 and 20 per cent in the near future.
Investors cite rising geopolitical risk and a slowdown in emerging markets as the foremost reasons for market correction.
SSGA found 68 per cent of Asia-Pacific investors said they had made no change to their level of downside protection.
Investors also voiced the view that volatility is the “new normal”.
“If investors believe volatility is here to stay, they would be well advised to address portfolio risk and investigate lower-cost solutions such as investing in low-volatility equities, managed-volatility indices and objective-based strategies which measure against a desired result rather than a traditional index,” Mr Wills said.
“Asset managers can play a role in helping investors better understand such strategies and work collaboratively with clients to develop solutions with the right level of security."
While most investors expect a correction, approximately 96 per cent are also confident that they can withstand a downturn.
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