No country in Europe has a bigger bond bias than Portugal, where only some 7% of total assets are invested in equities. European government bonds make up almost a third of the total asset pile, according to data from the Portuguese Investment Funds Association APFIPP. As yields on Portuguese 10-year government bonds have halved to below 2.4% over the past year, Portuguese fund selectors have now started to disqualify bond funds. Close to a quarter of them have no exposure to bonds anymore, up from none in May last year and compared to the current Pan-European average of 15%. Only a France, the percentage of non-government bond investors is higher at 28%.
But the trend is even stronger for developed market corporate bonds. A staggering 40% of fund selectors recently interviewed by our researcher have no exposure to this normally widely used asset class. In May last year, 52% of delegates at Expert Investor Portugal in in Lisbon said they would decrease exposure to investment-grade credit, and many seem to have kept their word.
QE windfall for European equities
So where is this disinvested money going to? The most obvious destinations seems European equities, which remains the most popular asset class by a large margin. A couple of fund selectors from the top-5 banks in the country told our researcher they are in the process of moving money from their bond holdings to the asset class. They expect a clear ‘Q€’ boost for the equity markets, though doubt whether it will trickle through to the real economy considering interest rates are already very low.
Almost six in 10 fund buyers say they plan to increase exposure to the asset class, while only 8% want to reduce allocation. This is a clear improvement since October, when 20% intended to sell some of their European equity holdings. The Portuguese also rather unsurprisingly welcome the devaluation of the euro, as it renders European companies more competitive and improves profitability.
Absolute return: a bond alternative
Absolute return products are taking hold in Portugal in response to the low-yield bond environment. Until very recently, appetite was lacklustre at best. But since autumn last year, as local fund buyers had started to consider alternatives to their fixed income exposure, appetite has surged. Some 36% of interviewees will increase their exposure to absolute return in the next 12 months, while almost none say they want to decrease it. Most seem to favour a long-only approach after the disappointing results of most long/short strategies over the past two years. Both long/short bonds and equities are highly unpopular. Only multi-strategy funds have a relatively large fan base: of those who use this type of funds, which are typically intended for very conservative investors, almost all say they want to step up exposure.