Three snapshots for Thursday
OECD growth forecasts released today show the euro zone countries lagging behind other G7 countries:
Reuters latest asset allocation polls showed global investors cut government debt from portfolios in March:
Germany’s unemployment rate fell to a record low of 6.7% in March, bucking the trend in other euro zone countries:
Time for a slice of vol?
As the global markets consensus shifts toward a “basically bullish, but enough for now” stance — at least before Fed chief Bernanke on Monday was read as rekindling Fed easing hopes — more than a few investment strategists are examining the cost and wisdom of hedging against it all going pear-shaped again. At least two of the main equity hedges, core government bonds and volatility indices, have certainly got cheaper during the first quarter. But volatility (where Wall St’s Vix index has hit its lowest since before the credit crisis blew up in 2007!) looks to many to be the most attractive option. Triple-A bond yields, on the other hand, are also higher but have already backed off recent highs and bond prices remain in the stratosphere historically. And so if Bernanke was slightly “overinterpreted” on Monday — and even optimistic houses such as Barclays reckon the U.S. economy, inflation and risk appetite would have to weaken markedly from here to trigger “QE3″ while further monetary stimuli in the run-up to November’s U.S. election will be politically controversial at least — then there are plenty of investors who may seek some market protection.
Societe Generale’s asset allocation team, for one, highlights the equity volatility hedge instead of bonds for those fearful of a correction to the 20% Wall St equity gains since November.
A remarkable string of positive economic surprises has boosted risky assets and driven macro expectations higher but has also created material scope for disappointment from now on. We recommend hedging risky asset exposure (Equity, Credit and Commodities) by adding Equity Volatility to portfolios.
The Great Switchback and the ERP?
The risk of a whiplash-inducing switchback from core AAA bonds to equity and risk — now that euro/banking systemic fears have eased and a global economic stabilisation seems to be underway — is suddenly top of most investors’ agendas. Last week’s surge in U.S. Treasury, German bund and British gilt yields as global stocks caught a fresh updraft saw U.S. equity outperform bonds by almost 5 percent, according to Societe Generale. While not historically shocking in itself, SG reckons the cumulative weight of several weeks of this may well be having its impact on asset managers as the Q1 comes to an end.
Coming on the back on several weeks of equity outperformance, those remaining overweight bonds will be finding life particularly uncomfortable right now.
The question for most strategists is whether this is start of a wholesale rebasing of portfolios that could see dramatic asset allocation shifts over the coming quarters.
Deutsche Bank equity strategists said they reckon 10-year U.S. Treasury yields could “easily” rise another 45bp to 2.70% over the remainder of the year if expectations for policy rates remain unchanged. Its “ready reckoner” suggests such a rise in bond yields would take 3% off equities, all else being equal. However, they stress that if this is in tandem with rising growth expectations, the negative impact on equity could be more than offset.
But Goldman Sachs Asset Management Chairman Jim O’Neill told clients at the weekend that his long-standing bullish view on equities remains rooted in the extremely high global Equity Risk Premium — which measures the global trend growth rate (a proxy for long-term earnings growth) plus dividend yields minus real government bond yields. O’Neill said that despite a slowdown in the big emerging markets this year, most investors did not take account of the fact that the long-term global trend growth rate was still rising and was now about 4.2%. Real bond yields, meantime, were extraordinarily depressed by a host of policy actions and systemic fears.
Until both the consensus forecast of world GDP growth moves above 4.2 pct, and real bond yields rise a lot, then the ERP offers equity investors a great return. Simple, eh?
Emerging Markets: the love story
It is Valentine’s day and emerging markets are certainly feeling the love. Bank of America/Merrill Lynch‘s monthly investor survey shows a ‘stunning’ rise in allocations to emerging markets in February. Forty-four percent of asset allocators are now overweight emerging market equities this month, up from 20 percent in January — the second biggest monthly jump in the past 12 years. Emerging markets are once again investors’ favourite asset class.
Looking ahead, 36 percent of respondents said they would like to overweight emerging markets more than any other region, with investors saying they would underweight all other regions, including the United States. Meanwhile investor faith in China has rebounded with only 2 percent of investors believing the Chinese economy will weaken over the next year, down from 23 percent in January. China also regained its crown of most favoured emerging market in February.
Last year, the main EM index plummeted more than 20 percent as emerging assets fell from favour. So what is the reason for this renewed passion in 2012?
Firstly December’s LTRO — a multi-billion euro liquidity arrow from the cupids at the ECB has revived investor appetite for riskier emerging assets, boosting the index to around six-month highs since the start of the January. A second significant factor behind the resurgence in risk sentiment is that the market is daring once again to hope for an improvement in global growth, says Gary Baker, BofAML Global Research head of European equities strategy.
The big beneficiaries of all this have been emerging markets. It’s not just about liquidity. Clearly the actions of the ECB have been vitally important… but what you’ve also seen is an improvement in global growth optimism. If optimism over growth is improving then there may well be a more fundamental underpinning to the movement.
So is investors’ new-found love for emerging assets a passing flight of fancy or a true sign of commitment?
The significant monthly improvement in market sentiment towards emerging markets and the 44 percent level of investors overweight emerging markets are both events which have historically coincided with short-term underperformance by emerging equities, Baker says.
Global FTSE 100 shrugs off parochial UK GDP data
Britain’s FTSE 100 seems to be almost impervious to any bad data that can be thrown at it. GDP data shocked the market showing the UK unexpectedly contracted in the third quarter.
Sterling tumbled more than a cent against the greenbackand gilts jumped while the FTSEurofirst 300 pan-European equity index trimmed gains considerably.
But Britain’s FTSE shrugged it off, hugging its 1 percent gains in the face of data which shows the UK economy is still ailing badly.
It is the cosmopolitan nature of the FTSE which is keeping it buoyant. Miners and energy firms make up over 32 percent of the index, while miners banks, also very much global institutions make up a further 16 percent.
Howard Wheeldon on BGC Partners says:
“The FTSE is a function of globalalisation and trading conditions and growth elsewhere in the world have more of an impact than domestic growth. If the global recession is over and demand is picking up internationally, it’s all the more reason to close your eyes to what’s going on in the tiny island that it happens to be registered in.”
I think there has to be a reality check now otherwise we are in for a very slow 2009. I’m not sure that FTSE investors will hold on for much longer, rather we are in for a selling spree as seen by some of the Middle East profit takers. Bankers have not changed their behaviour and we have tried to regulate the markets too quickly, restricting credit lines to SME’s. The FTSE is clearly not bullet proof and I’m not sure that unrealistic or over optimistic views based on global theory or mathematics help anyone at this time.
Investors cutting back on equity buying
This month’s Reuters global asset allocation survey shows that investors have cut back on buying equities after an almost non-stop rally since March.
According to a survey of 49 leading investors in the United States, Britain, continental Europe and Japan, investors now hold an average of 54.9 percent of their portfolios in equities.
This is the lowest level since February and below the long-term average of 59.3 percent.
The Wrong Lesson
Investors learned the wrong lesson from the dotcom bubble, and ended up blowing another.
That’s the view put forward at the CFA Institute’s conference in Amsterdam by Ben Inker, head of asset allocation at GMO. He believes investors became so enamoured of diversification – which seemed to work like a charm for the large US university endowment schemes – that they ran headlong into risk asset classes and blew a giant risk bubble.
Inker argues that because investors rushed into risk asset classes indiscriminately, they ended up paying for the privilege of taking risk.
