Nearly three-quarters of investors believe that equity markets have hit their peak, up from 61% who said the same thing at the end of 2018, according to a report from financial data and information provider Preqin. Investors were divided, however, on whether all asset classes have topped out.
“The important question for investors is when – and how – they can weather a correction, said Amy Bensted, Preqin’s head of data products, in a statement.
A majority of investors said they believed both private equity and real estate assets are overvalued. 48% of investors in the private equity and real estate expect a market correction by the end of next year. However, investors were more positive about infrastructure and natural resources, with a majority indicating infrastructure was fairly valued and 27% saying natural resources assets are undervalued.
The report also said that 64% of private capital fund managers surveyed are not adjusting their investment strategy as a result of the current equity market cycle. For those that are making changes, a greater proportion are expecting to invest more in private markets.
64% of investors said they are intending to adjust their investment strategy for hedge funds as a result of the current equity market cycle, by shifting into more defensive strategies that provide downside protection and capital preservation.
Investors’ outlook on real estate performance is the most negative with only 11% believing the asset class will perform better in the next 12 months, while more than twice (23%) said they expect it to perform worse.
“Real estate has been a star performer in recent years, but there are signs that investors are concerned this strong performance may be about to weaken,” said the report. “Distributions reached record levels in 2016, but dropped off in 2017 and the 2018 figure to September suggests the full-year figure will be even lower.”
On the other end of the spectrum, private equity, private debt and infrastructure are still in high demand as more than 80% of investors in those asset classes said they will commit the same amount or more over the next 12 months as they did the previous year.
The report also found that across alternative assets, investors said they are most satisfied with the performance of private equity funds as 93% of respondents said the asset class has met or exceeded their expectations over the past 12 months.
“This is hardly surprising since private equity funds have consistently produced double-digit returns across the one-, three-, five- and 10-year timeframes,” said the report. “Investors in private debt, real estate and infrastructure funds are also largely satisfied with the performance of those asset classes.”
Investors in natural resources and hedge funds, however, were not as satisfied.
The report said that 37% of surveyed investors were disappointed with their natural resources investments over the past year. But Preqin noted that natural resources investors are mainly drawn to the asset class by the low correlation to other asset classes.
And 46% of hedge fund investors said performance had fallen short of expectations over the same time period, which isn’t surprising considering that after returning 12.06% in 2017, hedge funds had a reversal of fortune in 2018 and lost 3.08%. Nevertheless, the report said that “this is unlikely to deter investors given that many investors believe we are at the peak of the equity market cycle – hedge funds will be called upon to deliver more than strong returns going forwards.”