More than half the Brussels-based professional investors we surveyed in January 2012 expected to increase their EU equity allocations in the following 12 months (see graph 1).
When Expert Investor Europe returned to the city in November, many private banks, family offices and pension funds had made good on their plans, bolstering their weightings to the region during the summer months.
Investors confident there is more to come
This allocation shift – part of a broader recovery in appetite for Belgian equity funds in Q3 of 2012, according to ECB data (see graph 2) – enabled Brussels-based investors to participate in the subsequent stock market rally. And despite the sharp rebound in European equity prices, interviewees say the asset class remains undervalued. They currently favour value strategies, and are seeking the right balance between value and growth in their portfolios.
• Fund selectors are upbeat on all major equity regions.
• Appetite for corporate debt has softened, owing to valuation concerns.
• Property, infrastructure, multi-asset and absolute return are popular.
• Belgian financial services group KBC is in talks to sell Russia’s Absolut Bank. The sale is part of a series of disposals required to win approval for the €7bn KBC received in state aid.
• Business confidence in Belgium recovered slightly in November after falling to its lowest level for three years in October, according to the National Bank of Belgium.
• A survey by law firm Laga found Belgium is the second-most costly European country in which to dismiss white-collar workers, and one of the cheapest in which to fire blue-collar employees.
EM and US stocks
Strong appetite for both regions
Emerging market and US equities are also in demand – in line with our January survey (see graphs 3 and 4).
On the US, investors appear largely unconcerned with the impending ‘fiscal cliff’ – a combination of US spending cuts and tax hikes, due to take effect in December – and say the country’s economy is recovering well.
In the developing world, Belgian fund selectors are most bullish on Asia. However, rather than using region-specific mandates, they prefer global emerging market strategies which depend on fund managers to make asset allocation and stock- picking calls. While interviewees are willing to pay for this expertise, some complain that the management fees on EM equity funds are too high.
Interviewees unhappy with returns
There are also rumblings of discontent on equity income products. Many larger companies – particularly telecoms operators – have cut their dividends this year, interviewees note, leaving investors with disappointing returns. As a result, fund selectors say they are increasingly looking at opportunities outside of large-caps, and towards medium-sized and smaller companies.
Ethical investing on the agenda
Interviewees say they want to learn more about socially- responsible investing (SRI) – a growing sector in Belgium. The Belgian Asset Managers Association has actively monitored the SRI fund sector since 2001, assessing strategies on a range of criteria, including compliance with the UN Global Compact. It estimates that SRI funds grew from 1% to 6% of the Belgian market in the past decade.
Concerns grow on valuations
While Belgian investors are generally upbeat on equities, their appetite for fixed income has waned – a trend apparent in ECB data, which shows that almost €800m flowed into bond funds during the first quarter of 2012, followed by outflows of more than €500m in the second and third quarters combined. Indeed, our interviewees say they no longer view investment grade bonds as attractive on a risk/reward basis – a reversal of their position in January (see graph 5).
Fund selectors keen to learn more
Although they want something “spicier” in terms of returns, investors say lower- quality corporate debt has become expensive, following strong inflows into the asset class this year (high yield funds generated net sales of about €40bn in Europe during the first nine months of 2012 and accounted for a quarter of total fund inflows in September, according to Lipper). Nevertheless, interviewees remain interested in the sector and are keen to learn more about it. In January, about two- fifths of Belgian fund selectors said they planned to increase their high yield allocations (see graph 6).
Emerging market debt
Robust demand for EM sovereign and corporate bonds
In the sovereign debt universe, investors are likely to focus on emerging markets – in line with our January survey (see graphs 7 and 8).
Interviewees are also looking closely at developing world corporate debt.
Property, infrastructure and absolute return in vogue
Away from equities and fixed income, pension funds say real estate and infrastructure are attractive over the long- term. They are prepared to pay third-party managers where they do not have the investment expertise in-house, and say they have cash ready to invest in both asset classes. For private banks and wealth managers, the focus is on pre- packaged multi-asset solutions. They also express a growing interest in long/short absolute return strategies.
Credit default swaps
Uncertainty over CDS clearing
Interviewees are concerned about rule changes for over-the- counter derivatives markets, due to come into force at the end of 2012. In particular, private bank fund selectors say they are uncertain how the clearing of credit default swaps will be affected by the amendments, which are designed to improve transparency in derivatives markets.