Many were worried that a protracted power struggle in Rome, combined with continued uncertainty surrounding the impending US ‘debt ceiling’ deadline, could destabilise markets in the coming months. As a result, some professional investors we spoke to had already trimmed their equity weightings, in anticipation of a near-term correction.
European stocks
Fund selectors strongly bullish on EU equities
Nevertheless, when asked to consider their likely positioning in February 2014, interviewees revealed a highly-bullish stance on equities – especially in Europe (see graph 1). More than two-thirds of the fund selectors we consulted at wealth management, private bank and advisory firms, expected to increase their exposure to European stocks during the following 12 months. Despite last year’s rally, many say the asset class remains attractively valued and underowned by global investors.
Just a few of our interviewees were bearish on the outlook for European equities over the next year, on the basis that sustained performance could only be achieved following a final resolution of the eurozone debt crisis – something they said could take up to 36 months.
US equities
Stocks issued by US companies are popular
On a 12-month outlook, this group favoured US stocks instead, in expectation of higher growth rates across the Atlantic and further dollar appreciation against the euro.
While other fund selectors also planned to bolster their US equity exposure, they were generally less enthused by the asset class, especially in comparison with European stocks (see graph 2). Many expressed concerns over the debt ceiling, although most expected a successful resolution. Others were broadly upbeat on US corporate strength but argued that stocks were already expensive.
Emerging market stocks
Investors plan to keep their weightings steady
Few interviewees planned to actively increase their developing world stock allocations over the following 12 months (see graph 3).
But rather than a downbeat view on this asset class, this reflected the fact that many were already overweight in the region – one fund selector held 8% to 9% of her portfolios in EM stocks in February, compared with a long-term strategic weighting of 5%, for example – and a widely-held view that Western stock markets offered superior value.
Within the emerging market equity universe, interviewees were most upbeat on Asia and at least one fund selector viewed Chinese stocks as attractive. Another was wary on the Indian inflation outlook but upbeat on perceived opportunities in southeast Asia, including Indonesian and Filipino companies.
Developing world debt
Growing demand for EM corporate bonds
It was a similar story in emerging market debt, with many investors already significantly overweight and the majority expecting to keep their overall weightings steady this year (see graph 4).
But several interviewees have started to change the structure of their EM bond allocations, by reducing their sovereign exposure in favour of higher-yielding corporate securities.
One fixed income specialist noted that yields on Asian credit are attractive in relative and absolute terms, and forecast continued strong performance from renminbi-denominated securities.
Western bonds
European high yield offers value
Fund selectors noted that 2012 brought exceptional returns for lower-rated corporate debt, and most expected to maintain their high yield allocations during the following 12 months (see graph 5). Interviewees had mixed views on whether the asset class continues to offer good value, however, and there was a clear preference for European bonds, over those issued by US companies.
Appetite for investment grade was lower in comparison, and many Frankfurt-based investors planned to reduce their exposure in this area (see graph 6).
But it was still regarded as more attractive than western sovereign debt (see graph 7). Just one interviewee expected to increase his German bund allocation, by trimming his emerging market and high yield bond weightings.
Alternatives
Interviewees upbeat on Ucits absolute return
Outside the mainstream asset classes, interviewees expressed some interest in the predictable returns available from infrastructure linked to the renewable energy sector, including hydro- and solar-power plants.
Absolute return strategies were also popular (see graph 8), with one fund selector allocating about 15% of his portfolios to the approach. Many were wary on traditional hedge funds, and sought Ucits vehicles which could offer a blend of competitive performance and liquidity.
The industry
Fund selectors worry about over-regulation
Interviewees invariably highlighted the increasing burden of regulation as the biggest issue facing the financial services industry. One was particularly scathing about the proposed financial transaction tax, which will cover 11 EU member states, including Germany.
“Politicians are playing to the crowd,” he said. “There could be a point where the new regulations become too much and the banking sector is put in danger.”
Matt Darczynski and Will Jackson, members of EIE’s research team, collected the information in this document through a series of interviews with senior fund selectors and asset allocators, plus publicly sourced data. For more information, contact Matt at matt.darczynski@lastwordmedia.com or on +44 (0)20 7065 7576. Click here to see upcoming Expert Investor Europe events in Frankfurt.
