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This view – in part a reflection of the historic low yields available from bunds – is shared by many of his compatriots and is leading German professional investors to eschew European government debt, to seek better returns elsewhere. Indeed, although some of the private bank, wealth manager and family office representatives we consulted were assessing value opportunities in eurozone periphery sovereign bonds, two-thirds expected to reduce their overall EU government debt exposure during the following 12 months (see graph 1).

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Emerging markets

Key Trends
• Low government bond yields are forcing German investors to look elsewhere for returns.
• Corporate debt strategies are likely to be the biggest beneficiary over the next 12 months.
• Fund selectors also spy opportunities in European equities, including in the periphery.
• In alternatives, gold and exchange traded funds are becoming more important.

News roundup
• Private banks Berenberg Bank and Bankhaus Lampe upped their stake in fund platform Universal Investment to 50%.
• Fund of fund group Sauren announced its golden awards in September. More than 200 portfolio managers received an award, with 31 receiving three gold medals for “outstanding fund management”.
• Kuveyt Turk plans to launch Germany’s first Islamic bank. The Turkish group will seek customers among Germany’s Muslim population of about 4 million.

Fund selectors have concerns but are likely to increase their exposure

Appetite for developing world sovereign bonds has also weakened (see graph 2), with German fund selectors taking a more discerning approach to the asset class. Many want further guidance on opportunities among the smaller ‘frontier’ countries, having become comfortable with investing in the larger emerging economies of Brazil, Russia, India and China. However, interviewees are unsure whether China is destined for a hard or soft economic landing, and worry about the potential implications for emerging nations if investment flows from the West go into reverse.

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Similar fears surround developing world equities, with interviewees concerned about over- reliance by companies on emerging consumers, and the potential for interventions by governments, following Argentina’s decision this year to nationalise the local assets of Repsol, a Spanish oil firm. Nevertheless, just one in five German fund selectors expect to actively reduce their exposure to emerging market equities (see graph 3). 

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Instead they are focusing on value – an approach best illustrated by one interviewee, who said he is seeking stocks which offer “€1 for 70 cents”.

Europe

Big companies are favoured and the periphery has appeal

In developed world equities, German investors are currently upbeat on large, blue-chip companies with diversified geographical exposures. European stocks offer better value than US equities (see graph 4), some say, on the basis that the latter’s superior economic performance is fully priced in and Europe retains a strong reputation for innovation and education.

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As in sovereign bonds, at least one of our interviewees is keen to examine value opportunities in the battered eurozone periphery. Energy is also on the agenda, meanwhile, with investors seeking to tap into the shift by many countries towards renewables.

Looking at the economic picture, fund selectors are concerned about the potential for higher inflation in Europe, while at the same time worrying about low growth. Despite the continuing eurozone crisis, investors still regard the euro as beneficial for Germany, overall.

Corporate bonds

German investors want more information on emerging market credit

A portion of the money currently sitting in EU government debt appears destined for corporate bonds, with two-thirds of our interviewees planning to boost their allocations to the asset class – up from just one-quarter in last year’s survey (see graph 5).

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Both the high yield and investment grade sub- sectors remain popular (see graphs 6 and 7), in common with investor appetite across Europe, but many Munich-based investors also express a high level of interest in the relatively new but expanding universe of emerging market corporate debt.

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Alternatives

Gold and exchange traded funds are growing in popularity

Volatility caused by uncertainty over the eurozone has created challenging conditions for investors, but some are keen to learn more about innovative vehicles which can use asset price fluctuations to generate uncorrelated returns. Meanwhile, German fund selectors say they are uncomfortable with traditional hedge funds, and are seeking reliable Ucits absolute return strategies.

Gold is considered an increasingly important asset class in its own right – a reflection of the broader appetite for tangible assets – and more than half of our interviewees expect to boost their exposure to the precious metal over the following 12 months (see graph 8).

The only dissenting voices come from pension funds, who note that the asset class does not generate an income. Passive strategies are also gaining ground, with asset allocators dedicating greater portions of their portfolios to exchange traded funds, in line with global trends. European ETFs had assets under management of more than €200bn in April, according to consultancy firm ETFGI.

The industry

Wealth managers face headwinds in the years ahead

Looking at the financial services sector, interviewees predict that cost pressures will cause the fund management industry to shrink, leading fund groups to focus their attention on a smaller number of high-value distribution channels. As a result, they say, an increasing proportion of German fund sales are likely to be made via insurance brokers, rather than wealth managers. Meanwhile, advisers face a significant additional headwind in the form of tougher regulation, which they fear will increase the administrative burden of compliance, and reduce the quality of service they can offer clients.

tom@ybc.tv

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