The runner-up, frontier markets, is a slightly unusual suspect though, as most European fund selectors still shy away from this relatively illiquid asset class. Perhaps in line with their preference for frontier markets, Luxembourg’s fund selectors also go for the riskier bond categories. Appetite towards emerging market debt is much larger than their desire to increase exposure towards developed market bonds.
Still going strong
The fund selectors our researchers spoke to still see plenty of opportunities in both large and small caps, though they acknowledged that valuations are starting to become demanding after last year’s good returns. Therefore, they feel stock-picking and company research are becoming increasingly important, slightly shifting their attention to small caps. 60% of interviewees will increase their allocation to European equities during the next twelve months. The remaining 40% will keep their allocation unchanged. Interviewed fund selectors mentioned the ongoing deleveraging process of European companies, leading to healthier balance sheets, as an important positive factor for the asset class.
58% of the fund buyers our research team spoke to will step up their allocation to frontier markets, a tiny but growing asset class accounting for only some 3% of the world’s market capitalisation. Only 8% will reduce their exposure during the coming twelve months, the lowest percentage of all European countries EIE’s research team is covering. The proportion of interviewees not using the asset class is, with 25%, also relatively low. This indicates that Luxembourg’s fund selectors are in general quite familiar with investing in frontier markets, an asset class many of their European peers tend to shy away from. The fund selectors we spoke to said they are especially focusing on Vietnam and Nigeria within the frontier markets, as these are countries with a large domestic market with good growth prospects.
Emerging market equities
Interviewees were also quite optimistic about the prospects for emerging market equities and consider stepping up allocation again this year. About half of the interviewed fund selectors expect an upturn to occur within the next six to twelve months. As a consequence, 47% of Luxembourg’s fund buyers
will increase their exposure to the asset class. Appetite for Asian equities is
equivalent to sentiment on emerging market equities as a whole.
US and Japanese equities
Luxembourg’s fund selectors are much less outspoken in their views on most other asset classes. A striking three quarters of respondents is neutral on Japanese equities, with many seeming to await the consequences of the recent VAT rise in Japan on local companies’ earnings. Investors are also net neutral on US stocks, with 60% planning to keep their allocations unchanged. Quite some interviewees see a peak in the US economic cycle being reached, prompting a correction on the US stock market within months. Some of these respondents are keeping their allocation stable for the time being, but said they are ready to move on to other regions if a serious correction materialises.
Emerging market debt
Largest appetite in Europe
Fund buyers based in Luxembourg are remarkably bullish on emerging market debt compared to their European peers. Outside the Nordics, they are the only European investors with a net positive view on emerging market government bonds. 27% of the people we interviewed will increase their exposure to the asset class, while a similar number will decrease their allocation. Sentiment on emerging market corporate bonds, an asset class that is slightly more popular among fund selectors at the moment, is even among the most positive in Europe. 33% of respondents will increase their allocation to the asset class, double the number of interviewees planning to sell.
Developed market bonds
Outright bearish, except for high yield
Luxembourg’s fund selectors will keep their allocation to developed market bonds largely unchanged during the coming twelve months. An overwhelming 64% of interviewees are not changing their weighting to developed corporate bonds. There is virtually no demand for developed market government bond funds at the moment. None of the interviewed fund buyers will increase their weighting, while 40% are reducing exposure. The only developed traditional bond category with a significant number of buyers is high yield. While the majority will keep their allocation unchanged, a fifth of interviewees will increase exposure. A similar number are planning to reduce their weighting. Like in many other European countries, absolute return is seen as a serious alternative to traditional bond investments. Demand for it is outstripping that for all other bond categories. 46% of Luxembourg’s fund selectors plan to increase allocation to absolute return, while only 9% will reduce exposure.