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market insight geneva 2013 q2

European Central Bank actions last summer, which included a pledge by its president Mario Draghi to do “whatever it takes” to preserve the euro and the introduction of an unlimited bond-buying programme, prompted European investors in aggregate to move some €20bn into equity funds in the second half of 2012 – reversing a similar-sized outflow in the first half, according to Lipper.

Yet Swiss investors slashed their purchases of equity funds in the second half of the year to CHF1bn, from about CHF7bn in H1, while net sales of bond funds remained relatively steady at just over CHF10bn (see graph 1). This apparent lack of risk appetite tallies with research conducted by Expert Investor Europe, which shows that Swiss sentiment on the macreconomic outlook failed to improve significantly during 2012, despite the environment of growing bullishness across Europe (see graph 2).

Our analyst visited several Geneva-based private banks, wealth managers and consultants in February, to assess where they are likely to increase and decrease their allocations in 2013. He discovered that many such investors have already restored their equity positions to neutral or overweight, from underweight, and are ready to take on more risk to achieve higher returns.

Western equities

Growing appetite for European and US exposure

Interviewees note that European equity investors were well-rewarded in the second half of 2012 and say they expect the trend to continue, particularly in the first half of 2013. In line with their growing appetite for risk, fund selectors plan to increase their exposure to mid- and small-cap companies in the region. Dividend-paying large caps also offer opportunities, they say.

While their focus is on value in Europe, Swiss investors are attracted to growth stocks in the US – a market of significant interest to delegates at the Expert Investor Switzerland event, which took place in Zurich last November (see graph 3). Interviewees in Geneva forecast a successful negotiation of the US ‘debt ceiling’ in the coming months, and strong stock market performance in the second half of 2013. They express a general preference for US equity funds run by boutique managers.

Fund selectors say they do not generally use thematic equity funds but our analyst found some appetite for energy and mining-focused strategies. There was also interest in the information technology sector – in particular with regard to the growth of cloud computing.

Emerging market stocks

Interviewees are upbeat on liquid Asian strategies

Appetite for equities extends to the developing world (see graph 4) and Asia in particular. More than two-thirds of our Zurich delegates planned to increase their Asian equity exposure, and Geneva interviewees are similarly bullish on the prospects for China. Fund selectors favour emerging market fund managers who invest in highly-liquid stocks and who can demonstrate local knowledge – either by being based in the region, or by travelling regularly to the countries in which they invest.

While some of our interviewees use exchange traded funds for short-term tactical positions, they have a strong general preference for actively-managed emerging market strategies.

Developing world bonds

Strong demand for sovereign and corporate debt

Fund selectors also seek emerging market exposure in the global bond universe. This is in line with the results of our Zurich survey, which found that many investors who already held developing world government debt planned to increase their allocations further (see graph 5). Geneva-based investors favour local currency securities – notably renminbi-denominated ‘dim sum’ bonds – in anticipation of a long-term strengthening of emerging market currencies against the Swiss franc.

There is also a growing appetite for high-yielding developing world corporate fixed income.

Western fixed income

Some concerns over US high yield

As previous Expert Investor Europe research has shown, investors based in ‘safe-haven’ countries have little appetite for their domestic sovereign debt, owing to the historically low yields on offer. Switzerland is no exception, as demonstrated by the almost two-thirds of Zurich delegates who planned to decrease their developed world government bond exposure over the following 12 months (see graph 6). Inflation-linked securities have some appeal among Geneva fund selectors, however, despite their view that inflation will remain steady in the near-term.

In developed world corporate debt, interviewees remain upbeat on high yield following its strong performance in 2012 – in line with our Zurich survey (see graph 7) – but some question whether US bonds have been overbought and are now expensive. Appetite for investment grade debt is lower in comparison (see graph 8), but fund selectors consider it preferable to Western sovereign bonds.

Convertibles

Investors are keen to learn more

In the middle-ground between equities and fixed income, fund selectors are enthused by convertible bonds – securities which offer exposure to the underlying equity price and have additional bond-like protection. Interviewees say they want to hear more about the benefits of using the asset class.

 

Ilyes Bdioui and Will Jackson, members of EIE’s research team, collected the information in this document through a series of interviews with senior fund selectors and asset allocators, plus publicly sourced data. For more information, contact Ilyes at ilyes.bdioui@lastwordmedia.com or on +44 (0)20 7382 4470. Click here to see upcoming Expert Investor Europe events in Geneva.

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