Eurozone Turbulence Prompts Uptick in US, Emerging Market Equities

A new Bank of America Merrill Lynch study has demonstrated that -- driven by Eurozone turbulence -- money managers are fleeing to US and emerging market equities.

(November 17, 2011) — Eurozone turbulence is prompting money managers to seek US and emerging market equities, according to a study by Bank of America Merrill Lynch. 

According to the firm’s November survey of fund managers, a net 27% of investors are overweight in emerging markets during the month, up from a net 9% in October. Meanwhile, a net 20% of investors are overweight in US equities, up from a net 6% in October.

A total of 72% of European managers who responded to the survey believe that Europe will sink into a recession in the next 12 months, up from a net 37% in October. Yet, fears about a global recession have waned slightly, with a net 31% of global investors expecting the world economy to avoid a recession, up from a net 25% the previous month.

“Strong macro headwinds and uncertainty about global growth kept investors stubbornly bearish in November,” the report stated. “Unsurprisingly, cash levels remained elevated at 5.0%. Despite broad risk aversion, however, investors became more constructive on EM as the relative growth potential, policy options, and equity underperformance gained investor attention…Sentiment also improved on China, where growth expectations became less grim (-25% this month from -47% last month) and the vast majority of investors now expect a ‘soft’ landing.”

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In August, the firm issued another report showing that global emerging markets have increased in popularity, as concerns about a weakening of the Chinese economy have subsided. The findings showed 19% expected the Chinese economy to weaken over the next year, down 20 percentage points from July. This improved outlook was supported by a shift toward commodities, Merrill said.

The firm’s evidence showcasing a greater attraction to US and emerging market equities follows a September report by the International Monetary Fund (IMF) that revealed that pension and insurance funds may up their allocation to equities and other riskier assets in emerging and developing countries. According to the group’s Global Financial Stability Report, historically low interest rates in industrialized markets are threatening pension plans in Canada, Germany, Japan, Switzerland, Britain and the United States. Due to the low interest rate environment of those markets, pension and insurance vehicles are being left underfunded as a result of their reliance on traditionally safe investments, which are yielding little or nothing.

Consequently, the IMF noted opportunity in more aggressive, relatively riskier assets.

The report stated: “Investing in emerging markets is seen as potentially increasing portfolio returns without taking on excessive risk. A number of factors contribute to this view, including (i) underweighting of emerging markets in most portfolios (although exposure was already increasing before the crisis), so that emerging market assets can help diversify portfolios; (ii) low returns and increasing risk in advanced economies; (iii) a favorable view of the liquidity available in most large emerging markets; and (iv) an improvement in economic outcomes and a decline in policy risk in emerging markets.”

In addition, the report concluded that new regulations designed to help lower exposure to high risk investments may actually be undermining global financial stability. “With many first-time investors taking advantage of the relatively better economic performance of these countries, the risk of a reversal cannot be discounted if fundamentals — such as growth prospects or country or global risk — change,” according to the report. “For larger shocks, the impact of such reversals could be of the same magnitude as the pullback in flows experienced during the financial crisis.”



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Integrated Markets Thwart Liquidity of China's Sovereign Wealth Fund

President of China Investment Corp. Gao Xiqing has said that as global markets are more integrated, it becomes more difficult to shed sovereign debt investments, Bloomberg reported.  

(November 17, 2011) — The head of the China Investment Corp. has asserted that as markets become increasingly integrated, it is more and more difficult for the sovereign wealth fund to rid itself of sovereign debt investments. 

“When we talk about international investments, we must consider whether they serve our interests,” the fund’s president Gao Xiqing said during a forum in Hong Kong, according to Bloomberg. “We can’t say that we’re a generous nation and we can help you at whatever economic costs to us.”

Gao added that increasingly integrated markets make the country’s financial security “more complex.” 

In August, CIC Chairman Lou Jiwei voiced similar sentiments following the release of the fund’s 2010 annual report. “The international investment environment is getting more complicated, and there’s great uncertainties towards sustained global recovery and growth,” Jiwei said in the fund’s 2010 annual report, referencing factors such as the eurozone crisis and soaring commodities prices. According to the CIC, the fund decreased investment proportions in North America and Latin America in 2010 while upping its exposure to the Asia-Pacific region, Europe and Africa. The annual report showed that the CIC’s global investment portfolio yielded a 11.7% return rate in 2010, about in line with gains achieved the previous year when returns were driven largely by heightened bets on commodities. In terms of asset allocation, the CIC funneled money into private equity, infrastructure projects, direct investment and real estate. Meanwhile, alternative investments increased to 21% of the global portfolio from 6% in 2009.

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recent analysis by J.P. Morgan revealed that sovereign wealth funds are reconsidering their investment strategies following low performance in equities against low-yielding fixed-income. “Ten-year returns on government bonds have been generally superior to those of public equities. However, these returns have been driven by large falls in bond yields,” Patrick Thomson, Global Head of Sovereign Wealth at J.P. Morgan Asset Management, said in a statement. “This fall in prospective government bond returns, combined with continued sovereign credit crisis and the ongoing volatility in equity markets, has encouraged many sovereigns to take a fresh look at the way they invest.”

Thomson continued: “Analysis of recent market events has also highlighted the fact that returns cannot be adequately modeled using normal distributions; therefore, investors need to consider the impact that ‘non-normal’ returns have on asset allocation.”

According to J.P. Morgan’s analysis, more than 50% of sovereign wealth fund assets are typically invested in publicly listed equity. A total of 31% are in bonds and cash, with the remaining amount in alternatives, including hedge funds, commodities, property or infrastructure.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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