The study, drawn from more than 230 institutional clients, shows investors are retreating from the listed equity market and looking elsewhere this year.

A survey by asset management giant BlackRock of 230 of its biggest clients, together accounting for over $7 trillion in assets, shows just over half (51 per cent) of them want to cut exposure to equities this year, while 47 per cent want to raise private equity holdings, a sign of how worries about stock markets are growing.

The world’s largest listed asset management firm also showed that only 14 per cent of clients want to increase holdings of equities in 2019; 38 per cent want to raise fixed income; and 40 per cent of them want to boost real estate holdings.

Investment managers and family offices were among the institutions covered in the study.

Some 56 per cent of clients said a possible shift in the economic cycle is one of the most important macro risks influencing their rebalancing and asset allocation plans.

In a continuation of a multi-year structural trend of reallocating risk in search of uncorrelated returns, illiquid alternatives are set to see further inflows.

The retreat from listed equities appears to be accelerating: 35 per cent of clients planned cuts in 2018 and 29 per cent did so in 2017. This trend is most pronounced in the US and Canada, where over two thirds (68 per cent) plan to reduce equity allocations, followed by APAC (40 per cent), compared with just 27 per cent in Continental Europe.

“As the economic cycle turns, we believe that private markets can help clients navigate this more challenging environment,” Edwin Conway, global head of BlackRock’s Institutional Client Business, said. “We have been emphasising the potential of alternatives to boost returns and improve diversification for some time, so we’re not surprised to see clients increasing allocations to illiquid assets, including private credit,” he said. 

Ironically, the desire to shift even more into private equity and other non-listed sectors, at the expense of listed stocks, could be an example of the kind of group mentality seen in markets over the years, often seen in retrospect as a mistake. There has been a significant rise in flow into private equity over the past few years, driven by a desire for the illiquidity premium that this asset class pays, contrasting with lower yields on equities.

Intended fixed income allocations have seen a rise, from 29 per cent planning to increase allocations in 2018, up to 38 per cent in 2019. Within fixed income, the shift to private credit continues as over half (56 per cent) of global respondents plan to increase their allocations with Asia-Pacific following the trend (43 per cent). 

BlackRock said survey respondents also expect to increase allocations to other fixed income areas, such as short duration (30 per cent), securitised assets (27 per cent) and emerging markets (29 per cent), most likely reflecting relative value opportunities in these asset classes.

Most institutions want to maintain or even increase their cash levels in 2019, especially in the Asia Pacific region, where a third (33 per cent) plan to increase their cash holdings to protect their portfolios.

ESG
Within equity portfolios, investors are changing their focus. The three most prominent considerations are to cut public market risk in portfolios, which was cited by two-fifths (41 per cent), while a third (32 per cent) want to boost allocations to alpha-seeking strategies and a quarter (28 per cent) will focus more on environmental, social and governance strategies and impact investing. (“Alpha” refers to the market-beating returns achieved by specific active strategies.)

“In a world of increased market volatility and great levels of uncertainty, clients are reimagining what they do with their risk assets. It’s important for clients to stay invested, with equities continuing to have a very significant role in portfolios and alpha seeking-strategies making particular sense in the current climate. We’re seeing clients becoming more purposeful about their alpha exposures going forward,” Conway said.