Not quite for Denmark’s fund buyers. When we polled them at the Expert Investor Denmark forum in Copenhagen last week, three quarters of the audience were convinced developed market equities will not go through a major correction over the next three months.
Rather than fretting about downside risk, now is the time to ride the next wave of an equity bull market that has just entered its ninth year. And Europe is the place to be: an astonishing 91% of Danish investors attending last week’s forum consider themselves European equity bulls.With delegates unanimous in their belief that the second round of the French presidential elections will end in a victory for the markets’ preferred candidate, GDP growth in Europe accelerating and the US VIX index at a 10-year low, a market correction is simply unconceivable for most of them at the moment.
Fund managers speaking at the forum agreed. “Europe definitely looks like a compelling trade,” said Kevin Barker, global equity specialist at UBS AM. “We’ve hit the bottom of the earnings cycle and growth accelerating, so you should see earnings upgrades there.”
The US equity market, on the other hand, “looks overextended”, said Barker. “If you look at the Shiller P/E, there’s definitely some risk there. Though it’s hard to predict what will happen, the real value trade is clearly in Europe.”
Mark Wade, head of credit research at Rogge Global Partners, sided firmly with the US equity bears. “I have a bit of a problem with US equities. We’ve seen multiples this high only in 1929 and 2006,” he said. “I don’t know whether we are two months or two years away from history repeating itself, but you’re seeing animal spirits going too far.”
Bullish absolute return managers
The risks in US equities notwithstanding, overall market sentiment is firmly on the bullish side. When even absolute return managers are bullish, that tells you quite a thing. Both the multi-asset/absoluter return managers attending the forum in Copenhagen consider a market correction as the biggest risks to their portfolios, as they are overweight risk assets.
“We are long equities, long emerging markets and short bonds,” said Florian Ielpo, a member of the cross-asset team at Unigestion. “Economic conditions are good and that pushes volatility down. You get expensive valuations and in the meantime your positioning in markets is also rising. In the longer term, this means we would be very vulnerable to a negative demand shock. But I think this is still unlikely to happen over the next six months,” he said.
The GAM Star Absolute Return Fixed Income Fund is also vulnerable to a risk-off move, said GAM’s Mark Pearce. “We are long risk assets and are short risk-free assets: if we had a large geopolitical event we would suffer.”