European equities were the most popular asset class with both fund managers and fund selectors at the end of last year, a very similar situation to what we are seeing now. The latter still overwhelmingly plan to increase their allocation to European stocks, while the former expect the asset class to deliver superior returns in the year to come.
With the MSCI Europe up some 12% since mid-December last year, the conclusion is that they made the right call. However, there are two asset classes that did even better than European equities in the past 12 months on an unhedged basis: US equities and Japanese equities.
Methodology: Every month we ask asset managers whether in one year’s time they think the index will be up by more than 5% (bull), between +5% and -5% (neutral) or down by more than 5% (bear). We then turn this into a figure ranging from +100 to -100 where +100 means every asset manager is bullish, -100 indicates every asset manager is bearish and 0 tells us that bears and bulls match exactly.
Interestingly, fund managers and selectors were both wrong in their outlook for US equities, but in quite different ways. Fund managers, who we ask every month for their one-year return predictions for each asset class on a local currency basis, were actually too optimistic, but only just yet. The majority of asset managers estimated in December 2014 that US equities would return more than 5% in the next 12 months. However, while it comfortably exceeded this threshold in almost any other currency, the S&P 500 returned only just over 4% in dollar terms…
Fund selectors, on the other hand, were too negative. In roughly half of the countries we survey, more people were planning to decrease exposure to US equities than were to increase it. However, in euro terms US equities actually outperformed their European equivalents by quite a margin (see chart below).
The land of the shining sun
However, the overall winner for the year are Japanese equities: they returned 11% in local currency terms, and even double that measured in euros. Asset managers saw that coming: an overwhelming majority expected the asset class to generate a return in excess of 5%. Fund selectors, on the other hand, didn’t think much of Japanese equities at the end of last year. Only one in five planned an increase. Though this was almost double the figure of those intending to decrease allocation, it’s definitely not a number displaying overt optimism.