(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.
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.”
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