Focus Group: Cautious optimism
Of the 34 investors polled for this month’s Focus Group, 56% are confident that the world economy and financial system is over the worst. As a proportion of the poll, this is up on last year, when the split was almost 50/50. The surprise, perhaps, is that the swing has not been stronger, given the stellar performance in 2013 of developed-market equities.
“Skeletons have come out of the closet and overextended households, and sovereigns have adjusted their savings balances, which suggests reduced downside risk,” said a Norwegian fund. “However, [there are] still ample debt levels, only moderate growth, and a more or less exhausted economic policy arsenal, suggesting the global economy is vulnerable in the case of a serious shock.”
Three respondents are very confident the worst is over and three feel certain it is, an increase on last year when only one respondent held these views. A Danish fund said: “Macro is starting to look like previous cycles, [with] the US taking the lead and Europe following suit. Emerging markets will also prove better than currently expected in the market, I believe.”
Four respondents say they are “concerned”, down from 10 last year. However, two are convinced that the worst is yet to come, whereas previously only one respondent felt this way. “The economy is recovering, but financial markets are overvalued,” said a Latvian fund.
According to a Dutch fund, the biggest risk to stability is “a stampede by young participants out of funds as soon as they can”, while a UK fund highlighted “tapering and irrational responses by so-called sophisticated financial institutions”.
A Romanian fund added: “The biggest risk would be the impact of tapering on both developed and emerging markets. A certain slowdown in emerging markets GDP growth is expected, but an even lower number would have a great impact on markets.”
Around half of respondents believe emerging markets are due to make up ground relative to developed markets in 2014, although the progress is likely to be slow and patchy.
While no-one guessed last year that global equities would enjoy a vintage year, they were bullish, with a majority forecasting a 5-15% total return. Sixty-four percent of respondents go for the same forecast for 2014 but there is a spread of opinion among investors who are prepared to consider lacklustre results and even meaningful losses. Twenty-two percent of respondents thought that equities would deliver less than 5% in 2013; for 2014 that has risen to 35%.
By the end of Q3 2013, the S&P500 companies’ average operating profit margin had reached a new record of almost 10%. Sixteen respondents think there will be similar margins by year-end. “Stronger GDP growth means increased topline growth on earnings, but also less bottom line growth, due to a more intense recovery in employment and wages,” a French fund said.
Twelve respondents think there will be lower margins, and six expect higher margins. A Danish fund said: “Focus will turn to growth, and pricing pressure will increase.” However, a UK public sector fund insisted: “Companies are not paying their employees enough [and this] will result in less demand.”
Respondents are less pessimistic on German 10-year yields, bunching in the 2-2.5% range for their estimate of the level likely to be reached. Whereas seven investors thought the highest rate for 2013 would be less than 1.5%, only one has ventured that low for 2014. At the time of writing, the yield was 1.7%.