According to a February survey, investors are currently the most ?bullish? on global equities than they have been over the last decade. They are positive on strong economic growth in spite of ris
According to a February survey, investors are currently the most ?bullish? on global equities than they have been over the last decade. They are positive on strong economic growth in spite of rising inflation.
The survey was carried out by BofA Merrill Lynch between 4th and 10th February and is considered a reliable measure of investor sentiment. 188 fund managers, who between them manage US$569 billion, were polled.
67% of the fund managers are currently overweight on global equities, which is the highest reading since the survey began asking this question in April 2001. This compares to 55% overweight in January and 40% in December.
According to the survey, the two regions most favoured by investors going forward are the US and the Eurozone. 34% of the fund managers are now overweight in the US. Appetite for Eurozone equities has increased, with 11% overweight in February compared to 9% underweight in January. There is growing optimism for this region and investors no longer identify Eurozone sovereign default as the primary risk. 34% believe it is the most undervalued region.
The inflation situation in the UK and the prospect of a Bank of England interest rate increase has led investors to be wary of this region, with 8% of investors underweight on UK assets.
The survey found that investors are confident in the global economy and corporate profits, even though a growing majority expect global inflation to increase this year.
Commodity price inflation was identified as the biggest risk now facing investors, but then again it also means that more fund managers are looking to benefit from rising prices and 28% are now overweighting in this asset class.
One result that stood out from the survey is that while 43% of fund managers were overweight in emerging markets, this dropped to just 5% in February. Investors are now taking a more positive view on key developed markets.
Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research, commented:
“Unusually, higher risk appetite has been accompanied by a dramatic downsizing in asset allocation to emerging markets, as surging global growth expectations have increased the value attractions of developed market alternatives.“
Emerging markets make an interesting discussion topic at the moment. So far this year total returns from emerging-market equities have been disappointing. Some investors did retreat from the region in early February after unrest in the Middle East but various commentators believe this to be short-term. For example Piero Ghezzi, head of global economics, emerging markets and FX research at BarCap said that the outflows were ?tactical? and not part of a strategic long-term trend. Analysts at Capital Economics do not expect the underperformance to last for long or for growth in emerging-market economies to slow sharply. They pointed out that emerging-market equities are not ?significantly mispriced? relative to developed-market equities.
The Barclays Capital 56th annual Barclays Equity Gilt Study, released on 10th February, also examines the prospects for emerging markets and concludes that these economies should deliver higher growth and lower volatility than in the past and that equity returns are likely to continue to outperform those of developed economies.
Taking currency rises, capital gains and dividends into consideration, Barclays projects that the benchmark MSCI emerging markets index will return an inflation adjusted average of 10.5% a year over the next decade. This would be higher than the 9.3% total returns average between 2000 and 2010, a period of considerable growth for the asset class.
Looking at economies and markets in general, the Study warns that the current focus of policymakers on short-term results could result in higher volatility. The extraordinary easy policies are providing a significant lift to financial markets but also signal important risks. One effect that we are already seeing is a sharp rise in raw materials and this, along with other factors, suggests the 30-year trend of disinflation is coming to an end. ?In the meantime,? the report says, ?investors should continue to focus more attention on selected emerging markets, where risk-return trade-offs are likely to continue to be more attractive than for developed markets.?
Emerging markets equities do have better macro fundamentals than developed world markets, but on the other hand they are not cheap and still more risky than developed market shares. Rising inflation is a risk for these countries and their governments may be forced to slow their economies down this year. Nonetheless I also believe this to be the area of the greatest potential returns for the next 10 years. However they should form part of a larger portfolio of equity funds as it would be very risky to just invest in this asset class, or indeed in any one asset class.
Seeking out diversification from a global and asset class perspective is more important than ever. Also, however encouraging survey results may be, you should never just follow the herd when it comes to investing decisions. Your purchases and portfolio construction should be governed by your individual circumstances, objective, time horizon and risk tolerance. Creating and maintaining a suitable investment plan is complex in the current environment and these are issues best discussed with an experienced wealth management advisory firm like Blevins Franks.
By Bill Blevins, Managing Director, Blevins Franks
16th February 2011
