Though Munich fund selectors are upbeat about the macroeconomic environment, EU equity sentiment is at its lowest ever recorded. Bavarian investors clearly prefer US equities now.
Emerging market equities
Cards on Asia
Two thirds of Munich’s fund selectors said they are going to increase their EM equity holdings over the next 12 months, the highest figure ever recorded in Germany. Moreover, while EM sentiment has been booming in Europe for the past five months, nowhere is the enthusiasm for this asset class as pronounced as it is in Munich right now. Munich fund buyers are now particularly enticed by the asset class because of the comparatively rosy macroeconomic picture for the region, especially for Asia. A number of interviewees mentioned commodity- and export-reliant economies like Indonesia, Korea and also Thailand, which has rallied strongly following the military takeover in May, as attractive markets. China is also popular with some fund selectors, despite the problems it is facing in its real estate market at the moment.
Emerging market debt
Government bond rally
Emerging market debt, especially government bonds which are usually denominated in local currencies, is popular for largely the same reasons as emerging market equities. A stunning 50% of interviewed fund selectors say they will increase their weighting to emerging market government bonds, while none will decrease their allocation. Though some fear the effects of Fed tapering, following last year’s mini crash affecting the asset class, most think this will be offset by looser monetary policy on the side of the ECB. Appetite for emerging credit is materially lower, but still higher than enthusiasm for any other bond category. Many interviewees say they find EM credit too risky and opaque an asset class to invest in. Only a quarter will increase their allocation, while 42% have no exposure to emerging market corporate bonds at all.
High yield
The exodus has begun
The popularity of emerging market debt contrasts markedly with that of the other fixed income categories, notably high yield. Many fund selectors told our researcher they are planning to decrease or liquidate their high yield positions as they feel spreads have tightened too much (see chart..). They have decided to move into emerging market debt instead, with the EMD-bulls being largely the same people who say they will decrease their exposure to high yield bonds.
Developed market government bond sentiment is largely unchanged compared to January, while some fund selectors have found their way back to investment grade corporate bonds.
US equities
Firmly back in favour
Fund selectors in Munich have switched their attention from European to American equities. The percentage of fund selectors increasing their allocation to the asset class (see chart..) is the highest ever recorded in Germany. Some 58% of fund buyers interviewed in the Bavarian capital last week say they will step up their allocation to the asset class within the next 12 months, while none said they were going to cut exposure.
The sole reason for not increasing allocation to US equities was their valuations. As our researchers have heard very frequently over the past months, fund selectors regard the current prices of American stocks as demanding. This was also the case in Munich, however the downsides to investing in the asset class were largely outweighed by the perceived benefits. Munich’s fund selectors unanimously agree that the economic recovery in the US is well underway. And that is not the only edge US equities have over Europe: American companies have less exposure to Russia, so they stand to suffer less from the conflict between Russia and the West; several fund selectors said they expect the dollar to appreciate versus the euro, which speaks for investments denominated in dollars. They were proved right almost instantly, as the euro plummeted versus the dollar after Mario Draghi cut the ECB’s key interest rate to a record low.
EU equities
Enthusiasm has faded
Quite some of Munich’s US equity bulls said an increase of their US equity holdings would most likely
go at the expense of their allocation to European stocks. And indeed, with the economic recovery stalling and a backdrop of looming Russian countersanctions, the number of fund selectors planning to increase their allocation to European equities has dropped to a mere 18%, resulting in European equity sentiment being net negative for the first time ever in Germany. This trend fits in well with the most recent fund flow data, which say European equity funds have suffered net outflows in July for the first time since March 2013. The conflict with Russia plays some part in the negativism about European equities. Though most interviewees said they expect the current conflict between Russia and the West can be contained, they see negative consequences for Western companies with a large exposure to the country.
