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japan kept at arms length

Within fixed income, developing world corporate debt looks set to supplant emerging market sovereigns as the bond sector of choice, while investor appetite for Western credit has faded substantially following last year’s rally.

EU and US stocks

Demand for European equities has strengthened since the second half of last year, and voting data gathered at our Q1 conferences suggests the trend will continue. About half of delegates at the Expert Investor Belgium, Barcelona and Nordic events expected to bolster their continental stock weightings over the following 12 months, while fund selectors at our Pan-European Congress in Provence were even more bullish on the region (see ‘European equities’ graph).

It was a similar story for US stocks, with all delegate groups seeking higher exposure to this market in aggregate. However, appetite was generally lower when compared with European equities. This was in line with our Fund Manager Sentiment Survey reading for the US, which declined during Q1, following euphoria over the resolution of the ‘fiscal cliff’ in January.

Emerging market equities

Developing world stocks remain the main attraction for fund buyers, and few of our event delegates planned to reduce their exposure here (see ‘Global emerging market equities’ graph). Interviews this year with professional fund selectors in Geneva, Frankfurt and Milan revealed a similarly strong appetite for global emerging market equities, and Asia in particular. Italian investors were keen to gain direct exposure to Chinese companies, for example, while others spied opportunities in the surrounding nations of Cambodia, South Korea and Vietnam.

As fund selectors become more comfortable with holding large emerging market allocations, they are also demanding more from fund managers investing in the region. Swiss interviewees sought highly liquid strategies and local knowledge, while Italians wanted to hear more from boutique-style EM specialists.

Fund managers are also bullish on developing world equities, although sentiment fell slightly during the first three months of 2013. The sharpest decline came in relation to Asia Pacific excluding Japan – where our reading fell from 60 in February, to 39 in March.


The declining expectations of fund managers for developing Asian equities contrasted starkly with their bullish outlook on Japan. The Nikkei 225 Index rallied strongly this year – in particular after the Bank of Japan announced an extraordinary stimulus programme in April. But even before the measures were revealed, fund manager appetite for Japanese stocks had soared. Our sentiment reading has risen continuously since the start of Q4 2012, and in March hit 72, its highest level since the end of 2005 (see ‘Manager sentiment’ graph).

This tallied with the latest Bank of America Merrill Lynch Global Fund Manager Survey, which aggregated the views of managers running almost $600bn (€460bn). The proportion of asset allocators long Japanese equities was the highest recorded since 2007. A sustained return to Japanese stocks may follow, BofA Merrill Lynch noted, given that fund managers were on average 31% overweight the region between 2003 and 2007.

Bullish comments from Deutsche Asset & Wealth Management were typical of the mood among fund managers. “If the Japanese currency remains at its previous level of ¥95 [to the dollar], we assume that profits of Japan April 2013 to March 2014] may grow by 40% to 50%,” wrote Lilian Haag, a Japanese equities specialist at Deutsche AWM, in April. “Based on the historical PER [price/earnings ratio] figure of 18, the Japanese equity market could increase by up to 20% by the end of the fiscal year.”

Yet Japan was the least-favoured equity region among all of our fund selector survey groups in the first quarter – perhaps reflecting the generally poor returns associated with this market during the past 20 years. Only Spanish investors displayed a desire for greater equity exposure to the Asian giant, with just under a third planning to increase their weightings.

Emerging market debt

Fund selectors are likely to focus heavily on developing world fixed income this year, at the expense of Western sovereign and corporate bonds. According to our research, emerging market credit – a market now estimated to rival US high yield in terms of size – looks set to be the most popular sector. Appetite for this higher-risk area of fixed income is particularly strong in Spain, where almost two-thirds of delegates planned higher weightings (see ‘Emerging market corporate bonds’ graph).

This stance was echoed by our interviewees, many of whom said they wanted to increase their developing world corporate bond exposure. Frankfurt fund selectors were particularly bullish on the asset class, and several were already shifting their EMD allocations from sovereign bonds to credit. Nevertheless, emerging market government debt is likely to remain popular in 2013, with delegates at all of our Q1 events planning to bolster their allocations in aggregate (see ‘Emerging market government bonds’ graph).

Developed market bonds

The historically-low yields on Western government debt mean appetite for this asset class is almost non-existent – none of our Expert Investor Spain delegates expected to increase their weightings, for example, while more than 80% planned cuts. Fund managers are similarly downbeat, with a strong majority bearish on the Citi World Government Bond Index, following a record low sentiment reading of minus 50 in December 2012.

Fund selector demand for western corporate bonds has declined, meanwhile – in particular for investment grade. Swedes were the least enthused by the asset class, and almost half of Expert Investor Nordic delegates planned to cut their exposure over the following 12 months. Geneva and Frankfurt interviewees revealed low levels of appetite for the sector, but said it remained preferable to ultra-low yielding Swiss and German sovereign bonds.

Event delegates were also ready to take profits on high yield following last year’s rally, and only Spanish investors expected in aggregate to increase their exposure further this year (see ‘High yield bonds’ graph). Interviewee groups were worried about valuations in the US high yield market specifically, with German investors expressing a strong preference for European securities.


Appetite for absolute return-style strategies continued, with delegates in Belgium, Sweden and Provence all planning to bolster their exposure in aggregate. German interviewees said they were wary of traditional hedge fund structures and sought Ucits vehicles which could offer a combination of competitive performance and liquidity. In addition, Italian and Swiss fund selectors said convertible bonds were becoming an increasingly important asset class.

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Part of the Mark Allen Group.