BofAML: Keep Hold of Your Equities Until at Least 2014

Stocks should be held until at least the end of the year, according to Bank of America Merrill Lynch.

(November 1, 2013) – Developed market equities have performed well for investors in 2013, and Bank of America Merrill Lynch (BofAML) believes there’s still some way to go before the rally runs out.

Writing in a BofAML Global Research report, the strategists were bullish on equities until at least the new year for three reasons: Firstly, research suggests that two-thirds of global equity returns occur in the last 10 weeks of the year, on average, so it would be unwise to drop them now.

Secondly, its data predicted a further $13 billion of inflows would flood into global equities this week, leading to an annualized inflow total of $320 billion, the highest as a percentage of assets under management since 2004.

Finally, cash levels among investors remain high—4.4% on its global cash indicator index—and would need to fall below 4% in the November survey data before a tactical “sell signal” would be triggered.

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Developed world markets had performed the best in 2013, with developed equities up 20% since the start of the year, according to BofAML. In the US, pension plans reached 91% funding status on average last month, driven primarily by the rise in US equities.

However, investors should keep an eye out for over-valued stocks, BofAML warned. “While valuations are very rarely the catalyst for a market correction, on some popular measures they do look stretched. For example, US stock market cap to GDP, one of Warren Buffet’s favored valuation metrics, is currently 1.12x, clearly high by the standards of the last 60 years,” the report said.

“The measure is at the very least a reminder that growth in 2014, rather than liquidity, is essential to prevent an overshoot of the equity market.”

Bullish fund managers won’t be enough to lead investors to pile into equities though, according to consultants Redington.

Dan Mikulskis, co-manager of the asset liability management team at Redington, told aiCIO: “When advising clients on their equity allocations we are conscious that equities can rise, and fall substantially over short periods of time and this presents a challenge for pension schemes trying to manage their assets to deliver a target return in excess of liabilities, inside a given risk budget.

“We find that controlling equity risk, rather than solely focusing on return is a preferred approach when putting together an investment strategy. This means that exposure to equities will increase when risk (or volatility) is low and decrease when volatility is high.”

Related Content: Rising to the Challenge of Tricky Bond Markets and US Corporate Pension Plans Reach 91% Funded Status

Quantitative Easing has Pushed Investors into Alternatives

Research from Universal Investment has discovered that bond-heavy German investors are turning to alternatives in the search for yield.

(November 1, 2013) – The monetary easing policies of the US Federal Reserve and the European Central Bank have led German institutional investors to expand their investment horizons into alternatives, according to a German asset manager.

Most are now shunning traditional government bonds, Universal Investment said, but rather than take advantage of the improving Germany stock market, it seems the majority are more interested in real assets and private equity.

The low-rate and low-yield environment has hit investors hard, given the vast majority of their assets sit in bonds and gilts.

But now one-third of German investors said they wanted to increase their real assets focus, typically through real estate and infrastructure. A previous study carried out last month by Universal Investment also found German investors are moving away from direct property investment, preferring regulated fund vehicles known as Spezialfonds instead.

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Another 29% wanted to expand into private equity or loans, compared to just 20% who want to increase their equity portion of their portfolio.

This will be a dramatic shift, if it comes to pas—currently two-thirds of German institutional investors have less than 3% in alternatives. Almost a third of respondents said they planned to increase this percentage by at least three percentage points.

The investors were also deeply sceptical about the long-term impact of quantitative easing, with 61% of them believing that while the strategy bought global economies time, it did nothing to fix the structural problems.

Gloomier still, 78% of German investors believe we are still nowhere near the end of the financial crisis, and almost all of them believed low rates were here to stay both in the Eurozone and the US.

The survey quizzed 90 investors representing more than €300 billion from pension funds, insurers, and foundations.

Related Content: What Now for Fixed Income? and Why We’ve Not Seen the Back of QE (and Why We’re Not in Recovery Mode)  

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