SAN MATEO, CA--(Marketwire - May 14, 2012) - Despite strong U.S. equity market returns in early 2012 that sent the Dow Jones Industrial Average back above 13,000 by the end of February -- a level not seen since May 20081 -- indications are that many Americans remain investment spectators, reluctant to participate in the equity market rally, a Franklin Templeton global poll has found.
Conducted earlier this year, the Franklin Templeton Global Investor Sentiment Survey polled more than 20,000 individuals in 19 countries that represent 70 percent of the world's GDP.2 Designed in partnership with Duke University psychology and behavioral economics professor Dan Ariely, the survey examines what factors are influencing investors' outlooks and behavior.
Input collected from the 1,142 U.S. survey respondents suggests that their hesitancy toward investing in equities stems from an overall uncertainty about the global economy and market performance.
Market Volatility Breeds Lingering Investor Skepticism
U.S. respondents' perceptions of the economic landscape, both for the U.S. and globally, skewed toward the negative. Half of U.S. respondents believe the U.S. economy has deteriorated since last year, in spite of the fact that the Dow Jones Industrial Average had positive returns in 2011, as well as in 2010 and 2009.1 Such negative perceptions were even more pronounced when Americans looked globally, with 54 percent indicating a belief that the global economy deteriorated in 2011. U.S. respondents' perceptions of the global economy were in line with those of global respondents -- 51 percent of whom believe the global economy deteriorated last year -- but more negative than countries like India and Brazil, for example, where just 12 percent and 34 percent of survey participants, respectively, held this negative view.
Investor skepticism appears to be tied to the extreme volatility witnessed in 2011, in which the Dow Jones Industrial Average had 104 days of triple-digit swings -- representing a significant portion of the 252 total trading days last year.1 Indeed, when asked about the importance of various market scenarios when deciding to purchase an equity investment, market stability was most frequently identified by U.S. respondents as an important factor.
"The market volatility that has persisted since 2008 is keeping many investors on the sidelines, and their ability to view positive equity market performance constructively has been thwarted by the market ups and downs that are at odds with the stability they are seeking," said John Greer, executive vice president of corporate marketing and advertising at Franklin Templeton Investments. "But the reality is that investors who have been waiting for 'the right time' to get back into the equity market have been missing out on the market rally we've witnessed over the past few years."
Cautiously Optimistic for the Future
Looking ahead, Americans expressed varying degrees of optimism about overall return expectations in 2012, with 46 percent believing the market will be up slightly to up significantly and 36 percent anticipating an annual return of five percent or greater for equities, in particular, this year. In contrast, 19 percent foresee negative returns for equities in 2012.
Overall, U.S. respondents associate the greatest degree of risk with investing in equities. When considering the long-term investment risks of various asset classes over the next decade, stocks had the highest risk perception -- higher than either real estate, bonds or precious metals. Looking at a 10-year time frame, more than half (51 percent) of U.S. respondents consider stocks to be risky, which is on par with the 52 percent of global respondents holding this view.
Asked to apply their current risk appetite to their investment allocation plans, 43 percent of U.S. survey respondents indicated they would seek to adjust their portfolio to be more conservative this year, while less than a fifth (19 percent) would seek to be more aggressive. Among global findings, respondents in the Asia Pacific region were the most inclined to assume additional risk, with just 26 percent seeking to become more aggressive (vs. 21 percent for the global average) and 32 percent seeking to become more conservative (vs. 38 percent globally).
Home Country Bias Drives Current Behavior
Near-term pessimism appears to be leading many Americans to keep their investments close to home for the immediate future. When given the choice to invest in only one region next year, 82 percent selected the U.S. or a combination of the U.S. and Canada, while Asia and Europe, for instance, were chosen about 10 percent and four percent of the time, respectively. Home country bias among U.S. respondents was stronger than among global respondents, 56 percent of whom would select their own country in this scenario.
Home country bias may be generated by two main factors. According to Professor Ariely of Duke University, "The first is an overly optimistic belief about one's own economy. The survey shows us that respondents in almost every country had an expectation of performance in their country that is higher than what would be statistically realistic. The second reason is most likely due to procedural difficulties in investing outside the country -- such as less knowledge about how to access these markets, not having recommendations for such products and of course having fewer products available."
While U.S. respondents are largely country-centric in their current investment strategies, they did, however, indicate a desire to modestly increase their investments outside their local market over the next 10 years. A majority (75 percent) of U.S. respondents currently have a limited portion (20 percent or less) of their portfolios invested outside the U.S. When asked to look out 10 years, however, 37 percent of investors anticipate holding more than a fifth (21 percent or more) and 23 percent anticipate having more than two-fifths (41 percent or more) of their portfolios invested outside the U.S. in the next decade -- indicating a clear trend toward embracing global investing among long-term investors. Americans, however, anticipate moving at a slightly slower pace than the 44 percent of global investors who plan to hold more than a fifth and the 28 percent who plan to hold more than two-fifths of their investments outside of their home country by 2022.
"U.S. equities represent roughly just a third of the world's equity investments3, and so if investors are overly influenced by a home country bias, they may be closing themselves off to a wide range of compelling international investment opportunities and the diversification that a global investment portfolio can provide," said Greer. "However, it's quite encouraging to see in the survey results a willingness among U.S. investors to consider investment opportunities outside their borders and an openness to increasing their global exposure over the longer term."
Interestingly, U.S. respondents expect higher returns from emerging vs. developed equity markets -- 55 percent expect annual returns over five percent for emerging markets equities over the next five years, while 46 percent expect that level of returns from developed market equities.
Investors Recognize Need for Financial Advice
Despite their uncertain mood, most U.S. respondents affirm that responsibility for their investment planning, risk and investment decisions remains on their own shoulders. When asked to consider the most important parties for influencing their financial decisions, however, a financial advisor was the next most prominent choice after themselves and a spouse. Indeed, when purchasing or selling an equity investment, nearly two-thirds (64 percent) of U.S. respondents viewed advice from a financial advisor as important.
"Global uncertainty continues to weigh on investors' minds, and reinforces the need for a well-diversified investing plan and approach to risk management," said Greg Johnson, president and chief executive officer of Franklin Templeton Investments. "This is clearly an area where we believe financial advisors can play a critical role, through the value of their expertise and advice for investors."
The 2012 Franklin Templeton Global Investor Sentiment Survey included responses from 20,623 individuals in 19 countries: Brazil, Chile, Mexico, Canada and the U.S. in the Americas; Australia, China, Japan, Hong Kong, India, Malaysia, South Korea and Singapore in the Asia Pacific; and Belgium, France, Germany, Italy, Poland and the UK in Europe. The survey was designed in partnership with Dan Ariely, a professor of psychology and behavioral economics at Duke University and conducted online by Qualtrics. Respondents were selected from among those who have volunteered to participate in online surveys and polls and all were 18 years of age or older. Surveys were completed from January 30 to February 13 in all countries except Canada where the survey was completed from March 2 to 8. In general, gender distribution was representative of the larger population of each country, as were marital status, education and age.
About Franklin Templeton
Franklin Templeton Distributors, Inc. is a wholly-own 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, Fiduciary Trust, Darby and Bissett investment teams. The San Mateo, CA-based company has more than 60 years of investment experience and over $726 billion in assets under management as of April 30, 2012. For more information, please visit franklintempleton.com.
All investments involve risk, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with these markets' smaller size and lesser liquidity.
1. Source: Dow Jones & Company, Inc.
2. Source: International Monetary Fund, World Economic Outlook Database, September 2011. Gross domestic product figure based on purchasing-power-parity (PPP) share of the world total.
3. Source: As of 12/31/2011. ICI (Investment Company Institute), The World Bank: World Development Indicators: Standard & Poor's, Global Stock Markets Factbook (2012, 2011, 1995) and supplemental S&P data.
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