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market insight zurich 2013 q4

More than half the room was uncertain on the macroeconomic outlook, with the remainder split evenly into positive and negative camps. The result contrasted starkly with those seen at other Expert Investor Europe events in Q2, where fund selectors were mostly upbeat.

Caution was similarly the watchword for the Zurich-based wealth managers and bank fund selectors our researcher visited in late September. Many noted that their portfolios were light on equities, and that the asset class offered attractive valuations relative to bonds.

Yet interviewees worried about the threat of problematic inflation, owing to quantitative easing programmes in the developed world, and were keen to discuss how investors could prepare themselves for the next asset price bubble. Some were considering bigger allocations to precious metals, to hedge against such an outcome.

Absolute return

Strong demand for uncorrelated funds

These fears were also apparent in the appetite of interviewees for absolute return funds, which seek to generate positive performance irrespective of market conditions.

In line with a recent Expert Investor Europe poll of their German peers in nearby Munich, more than half of Swiss fund selectors planned to increase their exposure to such strategies – up sharply from last year’s Expert Investor Zurich (see chart 1).

Emerging market stocks

Investors confident on the long-term

As in many markets, Swiss investors reacted negatively to talk of US “tapering” in the second quarter of 2013, pulling more than CHF3.7bn out of domestic and foreign-domiciled equity strategies (see chart 2).

September data was unavailable at the time of writing, but Q3 looked likely to be another negative period for equity funds, given combined outflows of CHF1.6bn in July and August.

Looking ahead, equity products focusing on the developing world are most likely to gather inflows from Zurich-based investors, with a net 16% of interviewees planning higher weightings – down slightly from 2012 (see chart 3).

Fund selectors were confident emerging markets would continue to be an engine of global economic growth, despite recent signs of a slowdown.

Many interviewees pointed to rising consumer spending in the region as an encouraging shift, and expected the trend to continue.

Appetite for Asian (ex Japan) equities was marginally lower than for the broader GEM category, and substantially below the level recorded in Zurich last year (see chart 4).

While there was interest in China, some fund selectors said political risk made the country’s stock market unattractive.

Developed world equities

Limited appetite for Europe, Japan, US

Demand for European and US equity strategies is likely to be flat in comparison, with a small net share of interviewees expecting to reduce their US exposure (see charts 5 and 6).

Fund selectors were upbeat on the potential long-term economic benefits of the US shale energy revolution, but also worried about the country’s looming “debt ceiling” deadline.

As in other European markets, there was little appetite for Japan, despite strong performance from the Nikkei 225 Index this year.

Demand for the asset class among Zurich-based investors is likely to be neutral, in aggregate.

Emerging market debt

Corporate bonds are popular

Interviewees’ preference for emerging markets was similarly apparent in their attitudes towards fixed income.

On sovereign EM bonds, fund selectors were upbeat on the low debt levels and inflationary pressures in the region, which they said afforded governments greater policy flexibility than their western counterparts.

Nevertheless, some said it was important to be selective in the asset class, given that certain countries may struggle if western investors pull out in greater numbers.

There was strong appetite for developing world corporate debt, with a net third of our interviewees planning higher weightings (see chart 7).

Fund selectors said EM credit offered attractive valuations following this year’s sell-off, and that they felt confident in returning to the sector.

Western bonds

Allocations will remain steady

Demand for western corporate bonds will be muted in comparison (see charts 8 and 9).

Last year’s enthusiasm for high yield has largely evaporated, with the net proportion of investors planning higher weightings falling from 30% to zero.

However, some interviewees said the sector continued to offer attractive opportunities, particularly in securities from European issuers.

Overall appetite for developed market government debt is likely to be neutral, meanwhile, with equal proportions of fund selectors expecting to increase and decrease their exposures.

This marks an upturn in sentiment on the asset class since 2012, when almost two-thirds of investors planned smaller allocations.

Matt Darczynski 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 Matt at matt.darczynski@lastwordmedia.com or on +44 (0)20 7065 7576.

Click here to see upcoming Expert Investor Europe events in Switzerland.

tom@ybc.tv

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