Investor herding appeared to be the rule for the second consecutive quarter as an unprecedented 100% of readers surveyed by Wealth Manager said they had piled into European equity overweight positions in the period.
Extreme conviction positioning has been the norm in fixed income markets throughout the six years of surveying, with the number of respondents underweight developed sovereigns consistently above 80% and reported overweights only very rarely breaking into double digits.
But in recent years the phenomena has increasingly been obvious in major, core private client equity asset allocations, with wide quarterly swings in conviction reported in major geographic calls.
While readers have on one occasion previously reported unanimous neutral/underweighting to a major developed asset class, to European equity in Q2 2015, a unanimous overweight is unprecedented. The dramatic swing from just 17% of managers overweight earlier this year is also highly unusual.
The clustering at benchmark visible in US equity in the previous poll, with a record 52.9% at benchmark, has unwound slightly however, to a more normal dispersion of opinion (see bar chart).
The polarity of views on UK equity were also sharply extended however, with the 66.7% sitting at benchmark the joint second most extreme positioning in the asset class in the history of the poll. The exception to the rule was Japan, with rounded totals of readers in a dead-equal three way split.
While valuation is likely to be a key part of reader calculations, the lifting of some of the political clouds which had obscured the direction of the euro are also likely to have been a factor.
The single currency climbed to a six-month high versus the US dollar following Emmanuel Macron’s romping win versus the National Front’s Marine Le Pen in the French presidential ballot last Sunday.
After the Netherlands, that was the second major state to chalk up a sizeable electoral win for centrist, pro-European candidates so far this year, in verdicts which have gone far to lift the wider mood music on the continent. Political drift as US equities soared earlier during Q1 had driven the relative European discount to its widest in a generation on a range of fundamental metrics.
‘We believe that equities look better value than bonds from a valuation perspective and that regions such as Europe, the emerging markets and Japan look attractive,’ noted Peter Lowman, chief executive officer at Investment Quorum.
‘What we are now seeing is a decoupling of performance in certain regions and markets as we see outflows from those more expensive markets towards those that look more attractive. Also value has outperformed growth in recent times which has been quite interesting.
‘That’s not to say that the UK, or indeed the US or Asia are not investable. What we would say is that it has become much more stock specific and sector driven rather than owning the market.
‘Companies with strong balance sheets and cash flows are still attractive, especially if they distribute cash flows through rising dividends. In respect to sectors, we like financials, infrastructure plays, technology, healthcare and some consumer names.’
Of the managers to list major geographical calls as the top hopes for returns over the next 12 months, three quarters named the continent. Others warned that a number of major hurdles remain to be cleared in the short term, however.
‘The main drivers of markets currently appear to be political risk and forex movements, which are incredibly difficult to predict,’ said Andrew Gilbert, investment manager and head of ethical investment at Parmenion. ‘[Its] very difficult to call.’
Despite a state of heightened anxiety on the front pages of the daily newspapers, at least two wags reported that their clients’ biggest concerns might be considered good kinds of problems. ‘Where they’re going to spend all their gains over the last five years’ said Alan Steel of Alan Steel Asset management, when asked what was his clients’ single biggest cause of sleepless nights.
David Burren, managing director of Warwick Butchart Associates, echoed that view: ‘Most are not worrying at all, given recent performance, but we worry about liquidity, rising inflation, dividend cover, etc etc.’
Among the possibly unexpected turns in asset markets this year has been the continuing downward tug of fixed income yields, even as the Fed began to choke off the supply of dollars. Real dollar rates are now sharply negative over the medium term and German rates are, at the near end of the curve, even more deeply negative than they were a year ago.
‘For all the obvious reasons, but the divergence in the economic conditions and political realities in different parts of the global investment market will continue to bring volatility and opportunity,’ added Burren.
At least as many correspondents described a reach for yield which took them into non-familiar asset classes as potentially dangerous as buying ‘safe’ instruments with near certain capital loss to maturity, however.
‘Like most, we are looking at alternative sources of income for clients, but trying to maintain diversification while doing so,’ said Rob Burgeman, London divisional director at Brewin Dolphin. ‘As such, infrastructure, property, global utilities, etc, all play a role.’
Parmenion’s Gilbert added: ‘We’re deliberately not chasing yield, as this is dangerous and we are committed to aligning outcomes with clients’ expectations. Unconventional assets are not a perfect solution as they have a number of other additional complexities to consider.’
Risk to yield
Others warned that extended risk in current yield markets was inevitable and managers just had to pick their preferred poison.
‘We are looking a long way outside the conventional space,’ noted Rory McPherson, head of investment strategy at Psigma. ‘Principally in asset-backed fixed income and short duration emerging and high yield debt.
‘This comes with more risk in terms of credit quality, but our belief is that the big risk is getting caught on the wrong side of rising rates following a 35-year bull market in rates.’
Away from specific asset classes, a small majority (53.8%) of investors believe that global corporate profits will continue to rise, versus 47.1% at the time of the previous poll. The number expecting profits to fall also rose slightly however, to 7.7% from 5.9% previously, with the balance predicting little change.
Following the peak inflationary impulse of Q1, investor expectations for the next 12 months moderated, but not by much. From 11.5% who expected a ‘significant’ increase in inflation in January and 88.2% who just expected an increase, 69.2% now expect it to rise, with 30.8% expecting little change, and the balance forecasting a fall.
While expectations of global growth appear to be similarly coming off the boil, with the number forecasting a rise falling from 58.8% to 38.5% quarter-on-quarter, wealth managers expect investor sentiment to remain resilient.
Risk appetite is predicted to rise by 30.8% of respondents versus the prior 23.5%. The number forecasting sentiment to fall dropped from 29.4% to 15.4%, but at least some of the difference was due to the minority 7.7% who expect it to worsen ‘significantly’, from zero previously.