A 10 per cent fall in global equity markets is likely within 18 months, according to a majority of institutional investors who run billions for the likes of pension funds, insurance companies and investment banks.
The survey of 54 of mega investors, commissioned by Managing Partner Group, found that fifth of respondents have already adjusted the portfolios they manage in anticipation of a correction. This adjustment involved selling some of their equity holdings.
Of those who have adjusted their portfolios, 40 per cent have increased their exposure to cash.
In all, 70 per cent of institutional investors expect equities to fall by more than 10 per cent within a year and a half, while only 12 per cent expect there to be no decline in equity prices at all during that time period.
The most likely reason for the slump, cited by 37 per cent of respondents, is a fear that stocks are currently expensive.
Nearly a fifth - 18 per cent - of those surveyed take the view that the ending of the central bank policy of quantitative easing will cause a correction in equity markets.
The link between equity markets and quantitative easing is that the extra liquidity pumped into global markets by quantitative easing pushes interest rates down.
This causes the income yield from lower risk assets such as bonds and cash to fall, rendering them less attractive, and arguably pushing investors into higher risk assets such as equities.
The ending of quantitative easing would be likely to cause bond yields and interest rates to rise, making those assets relatively more attractive to income investors, and causing a switch away from equities.
Peter Elston, chief investment officer at Seneca, is among the investors who take the view that a correction is likely within two years, and has been reducing his equity exposure accordingly.
The fund manager said equities tend to perform badly when monetary policy has been tightening for a prolonged period of time, which he believes will be the case by 2020.
But Jonathan Davis, who runs Jonathan Davis Wealth Management in Hertford, increased his equity allocation in 2017 and said he sees little reason to suspect a change in the direction of equity markets in the near term.
David.Thorpe@ft.com
