At our Expert Investor Nordic conferences in February 2012, February 2013 and May 2013, fund selectors were strongly upbeat on both regions, displaying a small but consistent preference for GEM strategies.
However, when our researcher returned to Stockholm in mid-December, he found that last summer’s EM sell-off – triggered by fears over the ‘tapering’ of the US quantitative easing programme – had dramatically altered perceptions of the developing world.
The pension funds, banks, wealth managers and insurers consulted were in aggregate neutral on GEM stocks, with an equal share of interviewees planning to increase and reduce their weightings (see chart 1).
Fund selectors had little appetite for Latin America, with many awaiting an upturn in Brazil’s sluggish economy before re-evaluating the region.
There was some interest in Russia, meanwhile, but only a handful of interviewees viewed this market as attractive, compared with the other emerging BRIC giants.
Asia ex Japan equities
Investors are upbeat on China reforms
In contrast, fund selectors were strongly bullish on Asia ex Japan equities, with two-thirds planning to increase their allocations over the following 12 months (see chart 2).
This was more than for any other major stock market region, and double the average recorded by Expert Investor Europe for Asia across its survey groups in the third and fourth quarters of 2013.
Investors were particularly enthused by China’s long-term prospects, given the reform programme announced last November, which included a relaxation of the country’s one-child-per-couple policy and measures designed to make its assets more accessible to foreign investors.
Interviewees expressed a high degree of confidence that China’s government would implement the changes.
Developed world stocks
US and European equities still popular
Swedish appetite for Western equities was lower in comparison but remained strong, with half of fund selectors planning higher European and US weightings (see charts 3 and 4).
Investors generally favoured the US over Europe in economic terms, and were largely unconcerned by the imminent winding-down of the former’s asset purchase scheme.
However, they viewed European stocks as more attractively valued, following last year’s US equity rally.
Japanese equity funds are likely to see outflows, with a net 6% of interviewees expecting to reduce their exposure to the country.
Some said the ‘Abenomics’ programme had created investment opportunities but others warned the reforms would take several years to have a meaningful impact, and that Japan continued to lack economic dynamism.
Global fixed income
Fund selectors are bearish on bonds
Appetite for fixed income mirrored general pan-European sentiment, with developed world government debt being the least popular sub-sector.
Half of our December interviewees planned to lower their Western sovereign bond weightings (although this was an upturn in sentiment compared with last February, when four-fifths of fund selectors expressed the same intention).
Western investment grade and high yield corporate debt strategies will also see outflows in 2014, our research indicates (see charts 5 and 6).
The biggest shift last year was in attitudes towards emerging market debt. In February, a net fifth of fund selectors expected to increase their exposure to sovereign and corporate bonds issued in the developing world.
But by December, appetite for both sectors had reversed (see charts 7 and 8).
Nevertheless, some investors remained interested in the long-term picture for emerging market corporate bonds, and said they would consider boosting their exposure in the second quarter of 2014.
Absolute return
Demand rises but scepticism remains
Some interviewees considered absolute return a viable alternative to fixed income, given the low-volatility targets of such strategies.
A net quarter of fund selectors planned higher weightings – an increase on February (see chart 9).
However, there was plenty of scepticism on the sector, and many said they had been unimpressed with the performance of traditional hedge funds.
Macroeconomic outlook
Riksbank inaction brings frustration
The preference of Swedish fund selectors for equities over bonds reflected their upbeat assessment of the global economic picture.
Some 72% were positive on the broad macroeconomic outlook, up from just 48% at our event last February.
Yet there was also widespread discontent with the perceived unresponsiveness of Sweden’s central bank.
Interviewees warned that the Riksbank’s decision to reduce interest rates in December, from 1% to 0.75%, was “too little, too late” to benefit the domestic economy.
Simon Andersson 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 Simon at simon.andersson@lastwordmedia.com or on +44 (0)20 7382 4477.
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