American Investors Optimistic about US Equity Market in 2014, Remain Risk Averse
Franklin Templeton Releases Results of 2014 Global Investor Sentiment Survey
San Mateo, CA, April 15, 2014 — While American investors maintain an optimistic outlook for the US equity market in 2014, they continue to be risk averse, according to Franklin Templeton’s annual Global Investor Sentiment Survey.
Nearly three-fourths of Americans believe US stock market performance will be up in 2014. Yet the largest portion of US investors surveyed (40 percent) plan to adopt a more conservative investment strategy this year, while 32 percent plan to make no changes. Just 28 percent of US investors plan to be more aggressive with their investment strategy this year (less than the average for survey respondents globally).
“Doing nothing presents a potentially costly set of risks. In the long term, remaining highly risk averse can cause investors to fall short of their goals,” said David McSpadden, senior vice president of Global Marketing Services for Franklin Templeton Investments. “The key is not avoiding risks but rather managing them. In our view, portfolios should be constructed and adjusted to ensure that any risks taken are intended, understood and appropriately compensated with long-term investment goals in mind. Equities are an important building block for diversified portfolios.”
One of the largest surveys of its kind, the 2014 Franklin Templeton Global Investor Sentiment Survey polled 11,113 investors in 22 countries across the Americas, Africa, Asia Pacific and Europe. Investors were polled on their current attitudes towards investing and their expectations for 2014 and the decade ahead.
Investor Sentiment Improves
Overall, investor sentiment has improved, with investors’ perception of stock market performance finally catching up to reality. It wasn’t until recently that post-crisis pessimism in the US started to fade, despite positive US stock market returns each year since 2008. The survey found that only 16 percent of American investors thought that the US stock market was down or flat in 2013, the lowest percentage of investors who perceived the market to be down or flat since 2009.
The 73 percent of American investors who believe US stock market performance will be up in 2014 represents an increase compared to the 65 percent who anticipated positive performance for the year when asked in 2013. In line with these increasingly positive market performance expectations, 84 percent of Americans report that they are optimistic about reaching their own financial goals.
Rising Rate Environment Confounds Investors
While the clear majority of US investors are anticipating higher interest rates in 2015 (67 percent), there is uncertainty as to what will happen to bond prices if interest rates rise. For instance, only 40 percent understand that bond prices typically fall as rates go up.
Despite uncertainty around the impact of rising rates, the survey found that US investors increasingly believe that the best fixed income opportunities are at home this year (60 percent) compared with last year (52 percent). Asia came in as the next most selected region for the best 2014 returns at a distant 12 percent.
“The combination of a gradually improving US economy and low inflation continues to point to a period of reasonably steady US interest rates for this year and potentially beyond, in our view,” said Christopher Molumphy, CFA1, chief investment officer of Franklin Templeton Fixed Income Group®. “We believe having some exposure to markets outside the United States that have different interest-rate dynamics, potentially higher economic growth, and in many cases less government indebtedness, is particularly important for fixed income investors today.”
Home Country Bias Persists
Consistent with global results, the majority of US investors believe stocks will be among the three top-performing asset classes in 2014 (68 percent). However, US investors demonstrated the most significant home country bias among global respondents when indicating which country they anticipate will experience the best equity returns. The number of US investors who think the US stock market will have the best equity returns in 2014 is up significantly over 2013 (64 percent from 54 percent). The countries exhibiting the next most home country bias by this measure were Japan (54 percent) and Australia (45 percent), compared to South Africa with the lowest (15 percent).
US investors’ home country bias is also reflected, though to a lesser degree, in expectations for long-term equity returns, with more than half (54 percent) of US respondents anticipating the US to have the best equity returns over the next 10 years. By comparison, China (45 percent) and India (37 percent) demonstrated the next most home country bias by this measure, while at the low end, just 11 percent of investors in Italy expect the best equity returns to be in their home market over the next decade.
While bullish on US equities, Americans also articulated concerns. When asked to name their top reservation about investing in the US, the most commonly cited response was the country’s large fiscal debt.
Looking at Opportunities Abroad
Behind the US, American investors believe Asia will offer the next best returns in equities in 2014 (17 percent) and over the next decade (22 percent). Additionally, almost one-fifth (19 percent) of US investors said they plan to add emerging market equities to their portfolio this year.
However, only five percent of US investors believe Western Europe will provide the best equity opportunities in 2014, and only four percent believe this over the next 10 years. Respondents cited the eurozone debt crisis as their top concern about investing in Europe.
“American investors today may be overlooking investment opportunities in Europe,” said McSpadden. “Those overly focused on their home country or on avoiding market volatility can be severely limiting their opportunity set. History shows that winners rotate — the top-performing asset classes in any given year might be vastly different the next. In many cases, it’s market volatility that creates opportunities for active managers to successfully capitalize on mispriced securities around the world for investors’ benefit.”
Interest in Active Management and Alternatives
The survey revealed that investors are seeking upside potential and downside protection in their investments. Over 65 percent of investors think it is important to either beat the market when it’s up or lose less than the market when it’s down. This may suggest an interest in active management.
Investors are also awakening to the opportunities in alternative investments. Twice as many US investors anticipate that alternatives will perform well in 2014 (up from 13 percent in 2013 to 28 percent in 2014). Eleven percent report that they will be adding or increasing their investments in alternatives in 2014.
“In today’s investment environment, many investors are seeking asset classes with lower correlations to the S&P 500, including alternative investments, to diversify their portfolios,” said William Yun, CFA1, executive vice president, Franklin Templeton Alternative Strategies. “Despite the perceived risks, we believe investors are becoming better informed about the diversification benefits of alternative investments when added to a portfolio of traditional assets.”
McSpadden added, “As investment choices evolve and different markets and asset classes move in and out of favor, one constant for investors is the value that a financial advisor can bring to selecting appropriate investments and maintaining a portfolio built to realize their investment goals.”
The Franklin Templeton Global Investor Sentiment Survey, conducted by ORC International, included responses from 11,113 individuals in 22 countries: Brazil, Chile and Mexico in Latin America; Australia, China, Hong Kong, India, Japan, Malaysia, South Korea and Singapore in Asia Pacific; France, Germany, Greece, Italy, Poland, Spain, Sweden and the UK in Europe, South Africa, and the United States and Canada in North America. Survey respondents were between the ages of 25 and 65 in Latin America, Asia Pacific and South Africa and 25 and older in Europe and North America. Respondents were required to own investable assets, such as stocks, bonds and mutual funds. In addition, a minimum investable asset threshold was set for each country to ensure that the respondent had sufficient investments, providing a knowledge base from which to answer the survey questions. The survey was completed from January 2 to 15, 2014, in all countries.
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Franklin Templeton Distributors, Inc., is a wholly owned subsidiary of Franklin Resources, Inc. [NYSE:BEN], a global investment management organization operating as Franklin Templeton Investments. Franklin Templeton Investments provides global and domestic investment management solutions managed by its Franklin, Templeton, Mutual Series, Bissett, Fiduciary Trust, Darby, Balanced Equity Management and K2 investment teams. The San Mateo, CA–based company has more than 65 years of investment experience and over US$886 billion in assets under management as of March 31, 2014.
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