market insight germany q1 2014

Half of the interviewed fund selectors are bullish on emerging market stocks. Several of them are

convinced markets are bottoming out as investor sentiment is now at the lowest level since 2008.

After the disappointing results of the past years, a number of fund selectors feel it’s time for a

‘contrarian trade’, considering emerging market equities have consistently outperformed their

developed peers from 2000 to 2010. On top of that, most interviewees are currently underweight

in the asset class after they had decreased their allocation last year following the start

of the U.S. Federal Reserve’s monetary policy tightening. While there is a consensus among

fund selectors that emerging market stocks are currently attractively valued, many interviewees

are hesitant to step in immediately. Most bullish investors prefer waiting on the short term,

and plan to step up their allocation during the course of the year. 

 

The fund selectors approach emerging market debt (EMD) in a similar fashion as EM equities, with most bullish fund selectors favouring a wait-and-see approach for the months to come.

Most agree on both local and hard currency EMD being cheap, with some respondents expecting prices to decrease even further. Sentiment between government bonds and credit is around the same level, with some interviewees citing strong upside potential for hard currency (corporate) bonds, while others are seeing more value in local currency debt as a consequence of the strong depreciation of many emerging market currencies over the past months.

 

Both developed market government bonds and credit are generally unpopular among Frankfurt-based fund selectors, though some of them 

are seeing opportunities in some niche markets. A majority of German fund selectors think high yield has become too expensive, highlighting that spreads have compressed too much leaving no upside

 potential for the 

asset class, especially in the long term. Considering the record low interest rate levels, some investors explicitly mentioned their worries about a possible crash of high yield. The rare bulls on the asset class focus on the short end of US high yield, lured by ‘still attractive’ interest rates. Though most of the interviewed fund selectors are already heavily

underweight developed government bonds, a significant number of them will decrease their allocation even further in the coming year. Still, some investors continue to see value in peripheral bonds, expecting spreads to compress even further this year.

 

German fund selectors increasingly feel the pressure of having to deliver attractive returns in an environment of record low interest rates. These investors feel the need to diversify away from traditional fixed income strategies, but are bound by their respective risk profiles. Therefore, absolute return pops up as an increasingly attractive alternative. 45% of respondents will increase their allocation to the asset class in the coming year, compared to just 29% a year ago. Fund selectors showed interest in a range of alternative bond strategies, ranging from catastrophe bonds to all-flexible bond funds, with one interviewee saying he sees a ‘Great Rotation’ happening, albeit not from bonds to equities but from bonds to absolute return strategies. Nevertheless, a number of respondents had some comments about the asset class, saying it’s not focused enough and needs specification.

European equities still are the most popular asset class among German fund selectors, with 50% increasing their allocation during the coming twelve months. As some respondents indicated they have reached their maximum allocation to European stocks and all are overweight in the asset class, fund selectors can still be considered extremely upbeat on the asset class. They definitely favour EU equities over US stocks, which many consider expensive. Still a third of respondents will increase their allocation to the asset class, saying US companies have an edge over European companies as they tend to be more domestically focused