Investors’ confidence in the global economic upswing is fading but this has not yet fed through into their expectations for financial assets, according to new research.

Although concerns about corporate credit risk are becoming more pervasive, with sentiment particularly souring for emerging markets, there is a “cognitive dissonance between people’s views about the economic cycle versus asset allocation decisions” with “people still pretty upbeat about earnings and equities”, according to David Bowers, head of research at Absolute Strategy Research, which carried out the investor survey.

The quarterly survey of 214 asset allocators who manage $4.1tn of funds found that expectations of an improvement in global business confidence had declined sharply since the start of the year.

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Optimism about the future performance of economic and financial markets has not recovered since a peak in late 2016 after the election of US President Donald Trump stoked expectations of substantial fiscal stimulus, and is now at its lowest level for nearly four years as market participants contemplate the implications of the escalating trade war, ASR found.

“This could be as good as it gets for global growth,” said Mr Bowers. “People were too optimistic at the start of the year and there is a risk of a classic tactical correction as they realise the synchronised global growth they were expecting is not materialising.”

Market participants have “drastically reassessed their regional preferences within the equity market”, Mr Bowers said. In the past three months investors have shifted to a bearish stance on emerging market stocks, while their expectations for US equities’ performance continue to rise.

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For only the second quarter since late 2014, investors expect US equities to outperform the rest of the world over the next 12 months.

In contrast, attitudes towards US corporate credit have begun to deteriorate, ASR found. Investors now expect US high-yield credit to underperform its investment-grade counterparts in the coming year.

“There is clearly a loss of confidence coming through in corporate credit, and it is very rare for stocks to do well when that happens,” Mr Bowers said.

The dip in investors’ economic expectations is likely to feed through into investment decisions in the second half of this year, he added: “There is still quite a lot of complacency and wishful thinking embedded in some investors’ mindsets.”

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