Corbin: Investors Less Upbeat about Economy, But Optimistic about Impact of Trump Policies

US equities are fairly valued or even overvalued, said an overwhelming 97% of institutional investors surveyed for Corbin Advisors’ first-quarter earnings primer report. More than four out of 10 investors (44%) of expect first-quarter earnings to surpass expectations – the highest percentage since December 2013 and substantially higher than the 35% figure Corbin reported for the fourth quarter.

The Corbin survey is based on input from 83 institutional investors and sell-side analysts globally.

“Valuation is one of the toughest issues today,” said Fla Lewis, chief investment officer at Weybosset Research & Management. “If interest rates stay low, everything is cheap. On the other hand, from the historical point of view, things are on the high side of reasonable. The truth probably lies somewhere between the two, but where?”

Institutional investors are also more optimistic about organic growth in earnings, with 62% anticipating it will materialize compared to 45% for the fourth quarter, Corbin, a Hartford, Conn.-based investor relations advisory firm, reported. However, twice the number of investors as in the last quarter also expect that margins would drop.

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Even though investors expect President Trump’s policies relating to infrastructure spending, tax cuts, and repatriation to come to fruition, they are less upbeat about the US economy than they were in the fourth quarter. One Trump policy they don’t expect to be implemented is his proposed “border adjustment tax.”

However, “our research indicates clear and widespread investor acceptance that Trump-based animal spirits and pro-business policy reforms will stimulate growth and extend what is already an exceptionally long recovery cycle,” noted Rebecca Corbin, Corbin’s founder and CEO.

Investors who responded to the survey also see valuations as less inflated overseas, which is why they are also interested in opportunities in non-US markets. Their sentiment on the Eurozone has picked up most substantially, with sentiment on India and Brazil following.

Institutional investors’ appetite for risk has also improved as they jettison more defensive plays in favor of higher-beta stocks. The technology and industrial sectors are also seeing more investor interest, according to Corbin, while the prospect of rising interest rates and deregulation is boosting the financial sector. Investors are most bearish on sectors where plays dominate and that could be hit by interest-rate hikes, including real estate investment trusts and utilities.

“Valuations are lofty, especially when considering the reality that much, if not all, of the upside is priced in, even as the Fed appears poised for a series of rapid rate hikes,” Corbin said. “Thus, any stumble in policy execution will likely have significant, negative consequences. Investors are increasingly aware of these risks as indicated by our survey; however, we have yet to see this awareness manifested in their actions. Stay tuned.”

Tags: Corbin Advisors, Donald Trump, Fla Lewis, institutional investors, Rebecca Corbin, valuation, Weybosset Research & Management

Spurred by a desire for improved returns and concerns about growing liabilities and disappointing performance in their traditional assets, more Asian institutional investors are pushing into alternatives, according to a new research report from Cerulli Associates.

In its latest publication, “Asia-Pacific,” Cerulli found that some institutions in Korea, Taiwan, Malaysia, and Singapore are setting specific investment goals for alternative investments. At the country level, the report found that Taiwan is motivated by underfunding of its pension liabilities. Underperformance by the Korea Investment Corp.’s direct investment program has prompted the $72 billion sovereign wealth fund to refocus the program on derivatives, Chairman and Chief Executive Hongchul Ahn said in a Dow-Jones Private Equity Report.

Thus far, the KIC has invested roughly $1 billion in direct private-equity deals and committed an additional $1.3 billion to private equity funds, LBO Wire reported in September.

Cerulli expects the trend to widen. “Across the region, investments in alternatives will proceed at different paces of allocation and levels of sophistication from market to market and institution to institution, but they will continue gaining strength as the hunger for returns persists,” the report concluded. “Competition in this space will only get stiffer as more asset managers try to get a slice of this increasingly attractive pie. Failure to build and position expertise in this space will be costly for managers that have not already done so.”

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Korean institutions are pushing the most aggressively into alts, with many seeking a 20% minimum allocation before 2020, Cerulli said. Disappointed by low yields, the Korean government has instructed its state pension funds to boost their allocations to overseas and alternative investments by two to three percentage points. This push was spurred by reports of higher returns the Korea Teachers Pension Fund and the National Pension Fund earned on their alt investment portfolios in 2015, relative to other asset classes, Cerulli said.

At the product level, the growth and increasing maturity of smart beta solutions is making multi-asset class (MAC) investing more popular as well. For example, Taiwan’s second-largest pension scheme, the Public Service Pension Fund (PSPF), recently invited bids for its first global multi-asset mandate, said Olivier d’Assier, Asia-Pacific managing director at Axioma. Mainland Chinese insurance companies, meanwhile, are looking at asset-backed securities, although they expect to maintain a heavy exposure to traditional fixed-income instruments.

While the Cerulli report shows it’s gaining ground noticeably of late, the Asian attraction to alternatives is not new.

As early as 2001, Asian investors showed an interest in hedge funds largely as a result of large losses they suffered during the Asian financial crisis, the collapse of property values in Hong Kong and elsewhere in the region, and the 2001 stock market decline.

Previously, these funds were off the radar screens of many Asian investors because the Hong Kong property market was delivering returns of 18% to 19% a year. Additionally, the regulatory environment in Hong Kong and Singapore was not hospitable to hedge funds, which private banks and advisers were selling primarily to wealthy individuals and smaller institutions. By 2001, however, hedge funds were delivering less volatile performance and beginning to attract larger institutional investors.

Tags: Alternative Investments, Axioma, Cerulli Associates, Hongchul Ahn, Korea Investment Corp., Korea Teachers Pension Fund, Olivier d’Assier, Public Service Pension Fund (PSPF)