A year ago, fund buyers in Munich were overwhelmingly positive about macroeconomic prospects. This time around, their outlook for the world economy is much bleaker (see charts below).
Battered by the spike in market volatility, they see themselves confronted with a peculiar mix of positive and ominous macroeconomic indicators. While the lower unemployment figures and improving economic growth in the US and Europe bode well for the world economy, the opposite can be said of the slowdown in China and the steep rise in volatility that has come with it.
Consequently, Munich’s fund selectors opt for the comfort of the Draghi-put. Even though our researcher returned from his visit to the Bavarian capital a day before the ECB-president suggested more European monetary easing was on the horizon, more than three quarters of interviewees indicated they were to increase their allocation to European equities anyway, up from a mere 18% a year ago.
Seeking refuge in Europe
Several interviewees felt European equities had been punished too much during the market correction at the end of August, But many also said an important reason for them to increase allocation is that European stocks are simply the least bad option. This makes a striking analogy with the plight of the tens of thousands of refugees who have been flocking to Munich in recent weeks. While the city’s fund selectors consider Europe a safe haven because of Mario Draghi’s commitment to money printing whenever necessary, as most other asset classes look hostile and dangerous, Syrians are coming to Munich because of the ‘Merkel-put’: the guarantee they will find refuge regardless of where they entered the EU.
A year ago, Munich’s investors favoured US equities, but the rise of the dollar and high valuations have dented the appetite for the asset class. Many interviewees said they have been shifting allocations from US to European equities in the past year.
Scared of EM
The bulk of the Munich investor community is made up of private bankers and wealth managers, whose conservative clientele made them to reduce risk significantly when markets started to show signs of stress over the summer. While many interviewees reduced their equity positions across the board in the wake of the market correction in the last week of August, emerging market and Asian equities are now their strongest underweights.
One in three plan to stay clear of ‘risky’ emerging markets altogether in the next 12 months while almost none are planning to add again to their underweight positions. Frontier markets are completely out of the question. Seven in 10 interviewees are not invested, and enthusiasts about the asset class are far and few between.