Quarter 3 - 2015
– For the last seven quarters we have spotted an unusual relationship between US equities, European equities and absolute return products.
– Over that time period, attitudes to European equities have been strongly correlated to absolute return products, while US equities have been strongly negatively correlated to both.
– This is also reflected in fund flows, in other words, when people sell out of US they buy Europe and absolute return.
– This trend became stronger over time, with almost perfect correlations (ranging from 0.85 to 0.99) for the year up to Q2 2015.
– It has only changed in the last data point, when we’ve seen both asset flow and attitude improvement in all three strategies.
Do you recognise this behaviour in your own portfolio construction? Has a negative outlook on US equities tended to push you to alternatives or European equities? If so, why? Please write to email@example.com to let us know and we will investigate further.
– At first glance you will notice that there is a lot more money in US-domiciled funds with net flows of over $800bn in passive equity funds in the past two and a half years alone. The equivalent figure for Europe-domiciled funds is roughly $70bn.
– More often than not, fund managers and fund selectors tend to agree on where they think the markets are heading. Not so, however, when it comes to the US and Japan.
– Prior to 2015 fund selectors had roughly the same views on the US and Japanese equity markets. Then in 2015 it diverged.
– As you can see from the top graph, the net % of fund selectors looking to buy more Japanese equities rose then fell, while attitudes to US equities fell then rose – close to perfect negative correlation.
– The views of fund managers, on the other hand, have been very different. They have been consistently positive on Japan, while the prediction on US equity performance climbed slowly until the start of 2015 and has since collapsed.
– So at exactly the time that fund selector outlook on the US is improving, the fund managers have rarely been so negative on the market.
– The difference in attitude to Japan could be explained by portfolio construction issues – when a fund selector moves assets out of the US, it has to go somewhere – on average, all the other asset classes will do better.
– But there is still a direct disagreement in the direction of US equities – next issue we will get an indication of who is right.
As Brexit negotiations draw to a close we looked into how UK and European fund selectors are planning on preparing for the upcoming year, how Brexit will affect their allocations and who they feel will lose out more after March 2019.
The great majority of wholesale fund selectors believe that ESG screening enhances investment performance.
Global emerging market (GEM) equities have been one of the most popular asset classes among pan-European fund selectors since Q3 2015 – but demand dropped dramatically during Q2 2018.
The fact that Europe is at an earlier stage in its credit cycle than the US is likely to drive issuance. While the US Federal Reserve has already embarked on rate hikes and begun unwinding monetary stimulus, the ECB is unlikely to begin hiking until it winds down its bond purchase programme, which is not expected to occur until later this year, and possibly not until next year. When rate hikes appear on the horizon, companies in Europe and elsewhere are likely to step up issuance in euro debt before it becomes more expensive to do so.
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