Fund selectors in Luxembourg are much more pessimistic this quarter than last, according to the latest Expert Investor Future Flows survey.
The respondents are all fund selectors, asset allocators and portfolio constructors working for mainstream financial institutions based in Luxembourg.
Investors in the Duchy tend to favour EM corporates, the survey shows, which is quite different from most other European nations.
Asia ex Japan equities is their top equity pick.
Unlike their counterparts in most other European countries, Luxembourger asset managers also like absolute return and long/short equities.
Frontier market equities has the most net sellers at the bottom of the rankings.
However, cash is negative, meaning respondents expect to put money back into the markets.
There does not appear to be an overwhelming appetite to sell – most investors seem to be waiting to see what happens in the next few months before making any major moves.
While US and Asia ex Japan equities have the most demand among fund buyers in Luxembourg – it has slowed on the previous quarter in both cases.
When it comes to market cap, the EI survey indicates a clear preference amongst Luxembourg managers for large cap, especially when it comes to GEM equities.
Value is the clear choice when it comes to European equities, but growth comes out on top for US and GEM equities.
Sense of caution
The latest overview from Luxembourg-based asset manager Sparinvest supports the general wariness expressed in the EI survey.
In its report for August, Sparinvest points that the current risk appetite and risk positioning do not seem to have changed noticeably since March – the expectations and positioning among investors remain characterised by scepticism and caution.
The report does, however, highlight generally positive economic data reflected in the revisions of earnings estimates.
It points to Citi’s Earnings Revision Index, suggesting the negative momentum in estimate revisions peaked in mid-March.
Over the following months, the index has increased significantly in tandem with the composite leading indicators turnaround.
Based on this, Sparinvest’s has maintained a tactical overweight of equities vs government bonds/covered bonds.
Value in unloved sectors
Regina Lombardi, manager of the BBH Global Core Select fund has reservations regarding overly positive sentiment towards equities.
She warns: “While the economic impact of Covid-19 has yet to be fully evident, many are speculating as to the shape of recovery, and we sense a growing complacency in equity markets that massive monetary stimulus coupled with fiscal stimulus will support asset prices for the foreseeable future irrespective of underlying business and economic conditions.”
Lombardi’s strategy is to remained focused on the underlying fundamentals of the investments in the Global Core Select portfolio and to maintain discipline and patience with respect to adding to existing holdings, culling weaker positions, and adding new companies when there is an adequate margin of safety.
Taking advantage of market volatility due to the pandemic and seeing specific value in some of the hardest hit sectors, is part of the BBH philosophy right now.
If the fundamentals of the business are sound, then Lombardi is prepared to invest – regardless of general sentiment towards the sector.
She name-checks InterContinental Hotels Group (IHG) as a case in point.
“We view IHG as a very strong fit with our investment criteria given its market position in its main segments, high returns on invested capital, long-term growth opportunities as more independent hotel owners convert to branded hotels.
“However, the company is clearly in the crosshairs of the Covid-19 pandemic, which poses an obvious risk to the company; 2020 is likely to be the worst year in the last two decades for hotels and the broader travel sector.”
She adds: “However, our view is that hotels are essential infrastructure assets and there is historical precedent pointing to branded hotels being more resilient than unbranded, and it is likely that this crisis will reinforce those advantages. “
Among the major hotel brand owners, Lombardi believes IHG is particularly resilient as 74% of its profits come from US operations and the company has minimal exposure to international travel, with its brands generally geared towards domestic leisure and transient business travel across individual markets.
As a midscale to upper-midscale operator, IHG’s brands can break even at relatively low occupancy rates and the company has taken steps to relieve pressure on its owner/operators.
At the current valuation, Lombardi thinks there is attractive return potential; however, she is taking a patient approach in terms of adding to the position.
Returning to the bond theme (so to speak), the Future Flows survey indicates that emerging market (EM) corporates enjoy the best investment sentiments.
Unconstrained bond funds and EM govvies also have a few more buyers than sellers.
In line with pan-European sentiments, the overall picture for developed market corporates is noticeably more positive than before.
In the remaining asset classes, there is still some appetite for absolute return and hedge strategies in Luxembourg.
As for other alternatives, commodities and convertible bond funds have the most buyers.
Sentiments towards passives, property and multi-asset products are mildly positive but not remarkable in any way.