Uncertainty over the future of the eurozone, combined with the continuing low interest rate environment, has left many professional investors planning reductions in their European asset allocations, in favour of emerging market and US securities. The pension schemes and banks our analyst interviewed in early December also expect to bolster their exposure to alternative strategies – notably absolute return.
Investors upbeat despite euro fears
Interviewees worry about the eurozone debt crisis, and the negative impact that krona appreciation against the single currency could have on Swedish exporters (Germany is Sweden’s biggest single export market and the krona has gained more than 20% against the euro since the end of 2008). Yet most fund selectors are sanguine on the broader macroeconomic picture, thanks in part to a largely upbeat outlook on the domestic economy. This contrasts with our survey of Swedish investors last February, when just one-third of respondents were upbeat on a 12-month view (see graph 1).
EM and US stocks are popular but Europe lacks appeal
Concerns over the eurozone are apparent in Swedish appetite for global equities. Our interviewees are upbeat on the broad asset class, but none plan to increase their European stock exposure during the next year – a turnaround from February, when one-third of survey respondents expected to bolster their weightings to the continent (see graph 2). Instead, investors favour higher allocations to the US and emerging markets – regions which surged in popularity during 2012 (see graphs 3 and 4). Some interviewees say they already hold 30% of their portfolios in emerging market stocks, and could increase their weightings by about five percentage points over the next year. They are particularly upbeat on the prospects for China, given signs that president-elect Xi Jinping may be willing to embrace economic reform, to combat a significant slowing in the country’s growth rate.
Absolute return funds are in demand
Low yields in many areas of the fixed income market are encouraging Swedish professional investors to consider alternative asset classes, as a diversifier for their equity exposure. Pension funds say Swedish real estate debt is attractive on a risk/ reward basis. But their main focus in the alternatives space is absolute return. More than two-thirds of our interviewees – about half of whom are fund selectors for state and company retirement schemes – say they plan to increase their allocations to such strategies over the next year (see graph 5).
Western government debt
EU sovereign bond funds will see outflows
Fixed income funds took the bulk of investor inflows in the first 11 months of 2012, according to data from the Swedish Investment Fund Association. Following an outflow in Q1, the asset class generated positive net sales in the second and third quarters, and was on course to repeat the feat in Q4 (see graph 6). From the start of 2012 to the end of November, net bond fund sales totalled almost sek18bn (€2bn), compared with an outflow of about sek2bn for equity products. Our research suggests demand for fixed income will continue. But as with equities, investors will largely avoid Europe and instead focus on US and emerging market securities. None of our interviewees expect to increase their allocations to EU sovereign bonds, for example, and more than two-thirds plan to actively reduce their exposure in this area during the next year.
Emerging market bonds
Appetite for EM government debt is growing
In contrast, nine in ten Swedish fund selectors expect to boost their emerging market government debt weightings – a significant jump since February (see graph 7) and the most positive response on this asset class from any Expert Investor Europe survey during 2012. Interviewees say higher weightings will be achieved via a blend of hard and local currency strategies. As in other European markets, investors also express growing interest in bonds issued by developing world companies.
High yield preferred over investment grade
As for Western corporate debt, Swedish interviewees are less enthused by investment grade than they were in February, when about one in three planned higher allocations (see graph 8). But appetite for (predominantly US-issued) high yield securities has grown (see graph 9). High yield indices rose strongly in 2012, generating doubledigit returns. While fund selectors do not expect a repeat performance in 2013, returns could still hit an attractive 6% to 7%, they say.
Patrik Engström (left) and Will Jackson (right), 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 Patrik at email@example.com or on +44 (0)20 7065 7582