March bulls give way to April bears in emerging markets
The dust has settled on a scintillating first quarter for emerging markets but the cross-asset rally of the first three months has already run out of steam. A survey by Societe Generale of 69 EM investors shows that over half are bearish — at least for the near-term.
This marks quite a turn-around from the March survey, when 80 percent of investors declared themselves bullish on emerging markets. What’s more, investors are currently running very little risk and 47 percent of hedge fund respondents (these make up half the survey) feel they are over-invested in EM. (The following graphic shows the findings — click on it to enlarge)
Almost a quarter of the hedge fund and real money investors are neutral tactically on the market, compared to just 4.5 percent last month. Serious optimism has dried up, SocGen commented:
Looking at the distribution of answers, it is quite clear that the mega-bullish investor on EM has disappeared at this point.
The return of worries about the euro zone debt crisis, U.S. growth and a slowdown in China have all contributed to a higher degree of pessimism on financial markets. It’s not all gloom though. Looking at emerging markets over the next 3 months, sentiment does pick up, with 64 percent of investors bullish. So this falling out of love with EM could be a temporary blip.
Only 13 percent of investors were more bearish on a 3-month time horizon than over the next two weeks. That included 83 percent of real money investors that believed in an improvement in the GEM outlook from two weeks to three months.
Japan… tide finally turning?
Until recently, when you mentioned ”Japan” in the investment context, you could almost hear a collective sigh of disappointment — it was all about recession, deflation and poor investment returns.
However, sentiment does seem to be finally changing, not least because Tokyo stocks have rallied almost 20 percent since the start of the year, outperforming benchmark world and emerging indexes.
The yen has also been on a (rare) declining trend since the start of February, with the selling momentum accelerating since the Bank of Japan set an inflation goal of 1 percent in a surprise move and boosted its asset buying programme by $130 billion on Feb 14.
A closely-watched survey by Bank of America Merrill Lynch showed record optimism on Japan’s growth among fund managers, with a net 91 percent of Japanese fund managers saying they expected the domestic economy to strengthen. That’s up from a net 47 percent two months ago.
Overall, survey partipants worldwide slashed their underweight positions on Japanese equities to a net 4 percent in March from 23 percent last month. This is the smallest underweight position on Japan since August. According to Gary Baker, head of European equity strategy at BofA Merrill:
There’s quite a change in sentiment towards Japan. If you have global growth then Japan… is a big cyclical region to benefit from that. While investment story is the same, what changed there is the yen weakness… it becomes easier to play the story.
What fund managers think
Bank of America-Merrill Lynch’s monthly poll of around 200 fund managers had a few nuggets in the June version, aside from the usual mood-taking.
Gold is too expensive. A net 27 percent of respondent thought it overvalued, up from 13 percent in May. Then again, the respondents to this poll have reckoned gold is too pricey since September 2009.
The fall in the euro should be tailing off. A net 14 percent reckon the single currency is still overvalued, but that is way down from the net 45 percent who thought so in the May poll.
BP is good for pharma. The net percentage of fund managers who remain overweight in energy stocks plunged to 7 percent in June from 37 percent in May as oil has continued to spill into the Gulf of Mexico. The stock beneficiaries have been “dividend friendly” utilities, telecoms and pharmaceuticals.
China’s growth is slowing. A net 27 percent of investors reckoned China’s economy will weaken from where it is now over the next 12 months. That probably has mixed blessings given that investors both are expecting China to pull the world along the course of recovery and are worried about its economy overheating.
Overall, the poll showed fund managers to be cautious about the world economy but not giving up on riskier assets.
The art of being passive
Hundreds or even thousands of ”active” fund managers are competing to add alpha to beat benchmark indexes, be it in stocks, bonds or alternatives.
The market is so efficient, historical performance is no guide to the future. It’s nearly impossible to find a reliable method to pick advisers who deliver the best industry returns year in and out. There are also costs, from visible ones such as management fees and custody and administration expenses to “below water” costs such as trading commissions (due to higher turnover), bid/ask spread (price to buy, another to sell) and market impact costs (larger buy/sell orders affecting price).
Given this, is there a point in investing in active funds? What about just diversifing your assets through passive indexes?
This is the philosophy behind London-based fund Frontier Capital Management, run by Mike Azlen.
Azlen told a briefing in his Berkeley Square office this week how a passive approach beats active investment most of the time.
Frontier’s fund invests in 8 classes and over 15,000 securities in asset allocation which closely mirrors one by endowment funds such as Harvard and Yale University. Azlen reckons average actuve fund expenses would be around 2.3 percent (or 9 percent for emerging market active funds).
For those of modest wealth there is an advantage to picking the stocks yourself across the sectors yourself rather than buying into passive funds.
You will be averagely lucky even if you don’t exactly track the index, and why be obsessive about that at long as it’s a 50/50 overperform/underperform probability?
Individual stocks will have a much greater divergence over a financial year than any passive fund.
If you buy separate stocks and split them between yourself and your partner you can take your full capital gains every year because at least some of them will go up – bed-and-breakfast them between the two of you. That would get you £20,200 tax free gains locked away even in years when the FTSE has fallen.
When I say ‘pick’ I do not mean attempting to pick winners – somebody out there is doing worse than average and it can’t be funds that outperform the market before costs, of necessity it can’t be a random selections, so it must be punters following tips or stockbrokers recommendations.
If you do this consistently, cashing in your winners every year you can also build up a bank of capital losses potentially to offset a sale of a second home etc.
from Commentaries:
Don’t hold your breath for European flotations
A web-based survey of more than 40 European institutional investors by investment bank Jefferies shows most -- 83 percent of those who responded -- are not expecting a re-opening of the IPO market in the UK and Continental Europe before the middle of 2010.
Only 23 percent of the analysts, portfolio managers and dealers surveyed reckon the IPO market will re-open by the end of this year.
Seems the world is still split on what type of companies will be floated though:
"40% of respondents believe that classic growth stories, similar to the deals priced in the US with their tech themes, will be best received at the early part of the cycle. However, 46% believe that more defensive growth companies will dominate."
Some other interesting tidbits: A third of those polled said they would only buy shares in the IPO of a profitable company, half think GDP growth is a pre-cursor to IPO activity taking off again and liquidity is key, with an expected free float of at least $100 million the starting point.
All food for thought for anyone thinking of floating or spinning off a business. After all, it usually takes months to get them off the ground.
from Commentaries:
Are pension funds ignoring climate risk?
And are conservation groups moving into the business of giving investment advice?
It seems an unlikely path for environmentalists to take, but this WWF commissioned report warning that failure to take carbon risk into account could knock pension fund returns raises some interesting points.
"Carbon Risks in UK Equity Funds" by Mercer and Trucost "outlines how fund manager complacency on corporate carbon performance could put pension fund assets at risk as carbon-intensive companies face rising carbon costs and their company valuations fall in the short-term in anticipation of future carbon risk".
The report argues that fund managers "could dramatically reduce the carbon footprints of their funds through stock selection without the need to alter sector weightings or their overall investment strategy".
It also encourages them to engage with companies in their portfolios and calls on them to support mandatory reporting requirements for corporate greenhouse gas emissions.
The research says climate change is of "little importance in fund managers' investment decisions", with the main reason cited for this "a lack of confidence in government policies to address greenhouse gas emissions".
WWF wants fund managers to see there are financial incentives for pension funds and other institutional investors to consider carbon risk. If nothing else, it has learned to speak their language.
Must everything be viewed through the myopic window of economics? It would seem that capitalism is the one world religion. Until we lose it, nothing will change for the good.
Falling on deaf ears
The European private equity industry today published its response to the proposed Alternative Investment Fund Managers directive that seeks to place controls on the industry.
In what it must hope will be seen as a carefully considered and constructed response to the European Commission’s hastily drafted and ill-thought-out proposed directive, the European Private Equity and Venture Capital Association — the voice for private equity in Europe — calls for the threshold for reporting on its companies’ activities to be lifted to 1 billion euros assets under management from 500 million.
It argues that private equity firms smaller than that specialise in managing small and medium-sized companies and should be subject to national legislation.
EVCA also wants a grandfathering clause introduced so firms existing funds that use no leverage and have no redemption rights (the vast majority of all unlisted private equity funds) would be exempt from the directive. It argues that failing to do this could result in termination of these funds “with disastrous consequences for the industry and its portfolio companies”.
The big question is who in Europe is listening?
Having already gained a surprise concession in the published draft, which lifted the reporting threshold to 500 million euros from an expected level of 250 million euros, private equity may be seen as pushing its luck by asking for further leeway.
While the Socialists lost ground to the Conservative right in the recent European Parliament elections, it would be a mistake to think that the left wing coalition leader Poul Nyrup Rasmussen will be any less strident in his call for stringent legislation on private equity and hedge funds alike. The right wing Governments in France and Germany have been just as loud in their demands for legislating of the industries.
Are you revolted yet?
Financial markets might be in distress and stocks are falling through the floor, but according to James Montier, global strategist at Societe Generale, we are not in the final stage of bubble burst yet. For one thing, the Financial Times is still too big. At a fund managers conference in London today, Montier — a renowned bear — noted a thesis by economists Hyman Minsky and Charles Kindleberger that bubbles go through five stages — displacement, credit creation, euphoria, critical stage/financial distress and revulsion.
Currently, he says, financial markets are going through the critical/distress stage but we are not in revulsion yet.
“In revulsion, the Financial Times will be three pages long and we will all be ashamed to be working in finance. Stocks will be unambiguously cheap,” he told a group of financial professionals.
I am in revolted at the way the Federal Government is hiding the truth from us.
The truth is, the “elite” around the world, want to make major changes.
The major change that they want in the United States, is to change our currency! The dollar is in decline, and by early next year will be worth nothing. Then they will introduce the “Amero,” where you might get two cents (IF you get that) on the dollar.
When the public comes to this realization, that their savings isn’t worth anything by the value of the American dollar, they will start “dumping it like crazy.”
Of course, they also want to have Canada and Mexico a part of the United States. No more boarders, and we will all have the same currency!
Brilliant idea of Bush Senior.
A riot of a recession
Every month, the financial services company State Street studies the trillions of dollars in institutional investor money it looks after as custodian and tries to gauge where things stand. Over the years, it has come up with a map consisting of five different regimes, or moods, to reflect this. They range from the bullish “Liquidity Abounds” in which investors buy equities and focus on growth, to the uber-risk averse “Riot Point”.
Guess what? Investors moved into “Riot Point” last month after flipping about for four months in the slightly less bearish but still risk averse “Safety First” regime. This essentially means that they gave up in October – which is not a particularly stunning finding given that many stock markets had their worst performance in decades.
So now comes the bad news. In the 11 years State Street has been drawing its map, the longest period of risk aversion as measured by investors being in “Riot Point” or “Safety First” was the nine months between February and October 2001. This almost exactly coincided with the then-U.S. recession.
State Street gently points out that the U.S. economy has yet to formally enter recession this time.
Star Coffey decides not to go it alone
So star hedge fund manager Greg Coffey has opted to join established firm Moore Capital.
In April, when high-performing, high-earning Coffey resigned from GLG, the market was awash with rumours that he wanted to start up his own firm, pulling in billions from investors.
However, times have changed in the hedge fund industry.
The average fund is down nearly 20 percent so far this year, according to Hedge Fund Research’s HFRX index, while emerging markets funds have taken a particular battering as markets such as Russia and China have fallen.
Fund of funds managers say that top funds that were once able to turn investors away are now open again as investors across the industry withdraw their assets.
So perhaps for Coffey, who forfeited a bonus reportedly worth around $250 million when he resigned from GLG, a start-up has just become too risky for now.
Many leveraged hedge funds have cut back borrowings due to pressure from prime brokers and losses on some investments, but what will their new business model be?
