Investors still 'nervous' about rotation into equities
GLOBAL – Institutional investors have been moving increasingly into equities despite the fact they remain “nervous” about the asset class, attendees at the Evercore Pan-Asset Conference ‘Charting the Minefield’ heard.
Matt Tickle, partner at Barnett Waddingham, said at the conference: “Our pension fund clients are happy with equities but are nervous, too, so they take profit whenever they can.”
Although, fundamentally, the economics have not changed, at present, equity markets believe in what politicians say, he said.
Julian Jessop, chief global economist at the consultancy, warned of “a day of reckoning” at some point, when quantitative easing must be withdrawn.
He said equity markets could be in for “quite a shock” at that point.
Jessop believes that the status quo in the euro -zone is unsustainable and that it will break up, with Greece being the first to leave.
But what is driving this equity rally, according to Stephen Cohen, head of EMEA investment strategy at iShares, is not investors pulling out of fixed income but rather a re-allocation from cash by big wealth managers.
Tickle added: “Pension schemes would love to buy bonds. There is a huge pent-up demand for bonds that won’t go away.
“Fundamentally, they want inflation protection. As soon as bonds fall in value, pension funds come in and prop the price back up through that demand.”
While speakers at the conference were divided on the future euro-zone, they were more optimistic about the US, saying its monetary policy made sense and that, while its problems were not over, the country was on the path to dealing with them and to reduce public borrowing.
In addition, its banks have begun to lend again.
Similarly, US small and mid-cap companies seem to become increasingly popular, also among European investors, attendees heard.
Matt Litfin, portfolio manager at US asset manager William Blair, told IPE: “[These companies] were generally unpopular after the financial crisis, but, as many are proving their own worth, they are back on the radar of European investors.
“Investors perceive small cap to be pretty far out on the risk spectrum and therefore US names are attractive today, more so than many parts of the world.”
Litfin said there was more room for small caps to reach prior margin peaks than for large caps.
“The Fed’s zero-interest-rate policies have helped corporate US, as with 3-4% the cost of debt for small and mid-sized companies is half of what it was for the last 20 years.
“This has caused solid revenue growth, while at the same time companies are run more conservatively than in the past. What has changed since 2008 is that investors have gone from depressed to cautious.”
Litfin said that, in terms of M&A activities, most small and mid-cap companies could find potential targets but had so far been gun-shy.
He said the healthcare sector was particularly attractive at present.
“The introduction of the Obama healthcare reform has increased the uncertainty in the [small and mid-cap] area, and companies are more likely to be wildly mispriced, and our analysis benefits from that,” he said.