Global Investing

Inside the Reuters investment polls

The headline news from our Reuters asset allocation polls this month was that not much has changed from December in terms of overall investment positioning, but that there was a decided shift from emerging markets and European stocks to North America.

But buried in the numbers were a couple of other things:

– Bonds are decidedly unpopular among fund managers. The overall global allocation was the lowest since February.

– Bond underweights have also been getting heavier and heavier since summer and now reflect significant bearishness.

– Within bond portfolios, however. U.S. debt was on the up, at levels not seen for at least 12 months. This contradicts the widely held view that Treasuries are losing their appeal.

– High yields are also clearly popular with a shift to “junk” from investment grade.

from MacroScope:

What emerging animal are you?

Ever since Goldman Sach's Jim O'Neill came up with the idea of BRICs as an investment universe, competitors have been indulging in a global game of acronyms. Why not add Korea to Brazil, Russia, India and China and get a proper BRICK? Or include South Africa, as it wants, to properly upper case the "s" - BRICS or BRICKS?

Completely new lists have also been compiled -- HSBC chief Michael Geoghegan has championed CIVETS to describe Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa (ignoring the fact, as Reuters' Sebastian Tong points out here, that a civet is a skunk-like animal blamed for the spread of the deadly SARS outbreak in Asia).

Fun though some of this is -- and no one can argue that BRICs has not had an impact -- there is a danger that the acronym could become more relevant  than the actual countries involved. For example, imagine Mexico, Uruguay, Panama, Philippines, Egypt, Turkey and Sierre Leone being lumped together because they spell MUPPETS.

Clever Fed

Proof  that a little surprise can be quite big.

Ahead of the Federal Reserve’s decision on more quantitative easing there were three possible outcomes that  could have threatened what is becoming a strong global equity rally. In short:

– Meeting expectations could have been seen as boring, leading to a sell off

– Not meeting expectations could have been seen as widely disappointing, leading to a sell off

Investors love those emerging markets

No question that investors are in the throes of passion over emerging markets. The latest Reuters asset allocation polls show investors pouring money into Asian and Latin American stocks in October to the detriment of U.S. and euro zone equities. Exposure to equities in emerging Europe, Asia ex-Japan, Latin America and Africa/Middle East rose to 15.6 percent of a typical stock portfolio from 14.3 percent a month earlier. untitled

from Summit Notebook:

Is emerging Europe out of the woods yet?

A surge in portfolio inflows is flooding into emerging central Europe, although yield-hungry investors are picking solid HUNGARY IMF/MATOLCSYpolicy and higher growth over countries still struggling to put the crisis behind them.

After deep contractions across the region, a two-speed recovery is underway, with countries boasting better debt fundamentals like Poland and the Czech Republic for the moment ahead of those who depend on foreign lending.

Investors are also dipping into countries like Hungary, but struggles by the new centre-right Fidesz government to get its budget deficit under control mean it is lagging for now, along with fellow International Monetary Fund benefactor Romania.

from Jeremy Gaunt:

And the investor survey says…

Reuters asset allocation polls for August are out. They show very little change from July, which suggests investors are still cautious and uncertain about what is happening.

One big difference, month-on-month, was a large jump into investment grade corporate debt.  Andrew Milligan of Standard Life Investments reckons this  may in part  have been because  sovereign debt rallied so much over summer that returns from government bonds are now too meagre.

Here is the big picture:

Poll

Brazil-style tax may not work for South Africa

Traders in South African securities woke to a nasty surprise this morning — media reports that the ruling ANC party is considering slapping a tax on “short-term” financial market flows, possibly similar to the 2 percent tax Brazil brought in last October.  Luckily for them,  it may not happen.

Like Brazil, South Africa is worried about the strength of its currency, the rand, which rose almost 30 percent last year against the dollar and has firmed a further 1.5 percent this year to trade near 7.25 per dollar. Analysts like Elisabeth Gruie at BNP Paribas reckon fair value would be around 9 per dollar.  South Africa, like Brazil, is a commodity exporter so needs a fairly valued currency. Hence the call for capital controls to keep out foreign speculative cash.

But the similarities stop there.

Investors may not have cheered the Brazilian tax but few have pulled their cash from the country, betting the returns on offer make the 2 percent levy worthwhile. But South Africa may have a harder time.  Its economy may grow this year by 3 percent compared to Brazil’s 7.6 percent. Johannesburg stocks, especially those of multinational precious metals firms are attractive but they are not cheap — they trade at 11.5 times forward earnings while Brazil’s are at 10.6 times. And the domestic consumption story is still weak in South Africa which makes its companies more vulnerable to the global growth picture.

Equities — an ‘even years’ curse?

Are global equity markets under an ‘Even Years Curse’ that sees them underperform bonds in even-numbered years but beat fixed-income returns in odd-numbered ones? After some number-crunching, Fidelity International’s’ director of asset allocation Trevor Greetham suspects so.

“It’s not just hocus-pocus but to do with global inventory levels,” he explained at a forum organised by the London-based investment house.

The inventory cycle typically lasts about two years. ‘Up’ years are good for company profits and equity prices with the inverse true when inventory levels are being drawn down. And over the last decade, Greetham notes, the ‘stocking up’ years have been odd-numbered calendar years while inventory draw-down years have been even-numbered ones.

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.

Too much correlation

Globalisation is evident in this graphic put together by James Bristow, a global equities portfolio manager at BlackRock. It shows the correlation between the U.S. S&P stock index and counterparts in Europe, Australasia and the Far East.

Basically, what happens these days on Wall Street is matched everywhere else, or vice versa.

It is a bit of a problem for long-term investors. One of the best ways to diversify used to be to buy outside your domestic market. Not so now. This is likely to push more institutional investors to non-correlated assets and hedge funds.