|
Inside European portfolios
Investors back off stocks, turn to bonds; money market funds popular
By Barbara Kollmeyer, MarketWatch
Last Update: 7:32 PM ET Mar 18, 2008
LOS ANGELES (MarketWatch) -- If tumultuous financial markets have given you sleepless nights as you ponder just how much of a bite your 401(k) is taking these days, take heart: things are no more pleasant across the Atlantic.
Investors there, as in the U.S., are nervous and their portfolios are reflecting their caution. The moves they are making overseas, though, may hold lessons for U.S. investors, who could benefit from a more global perspective.
"My perception is that European investors are doing what many are doing around the world -- reallocating money toward what they feel more comfortable with in terms of safe haven or less risky assets," said Larry Hatheway, London-based chief economist and global head of asset allocation at UBS Investment Bank. "From an asset-allocation standpoint, they're looking at government bonds and pulling down allocations towards equities."
The reasons for the caution? For starters, this is looking like the year when U.S. domestic markets gains could surpass many foreign markets for the first time in five years, not to mention the fact all markets are getting dragged up and down by U.S. volatility. The S&P 500 $SPX is down 9.37% so far this year, versus a 17.57% slide for the pan-European Dow Jones Stoxx 600 .
Then there's the credit crisis that began in the U.S. and is reverberating throughout the globe, with Europe banks just as battered.
And the housing crunch that is dragging down the U.S. economy hasn't been completely avoided overseas. In Britain, the air is expected to come out of the housing market at any moment, while unemployment levels in Spain are rising as construction jobs disappear amid a vast wasteland of empty new apartment buildings outside major cities like Madrid.
Given that backdrop, Europeans are saying "safety first."
Singapore-based Shiv Taneja, managing director for Cerulli Associates, a research and consulting firm that tracks sales for the global mutual fund industry, said that net sales for the European fund industry fell to 88 billion euros ($138.7 billion) in 2007, a quarter of the sales posted the previous year.
"What is rather disconcerting is that this 'inflow' was sustained largely by money market funds, without which the industry would have been in a net redemption position," said Taneja in an email interview.
Got the jitters
Europe's managers can back that up that assessment. Adrian van Tiggelen, senior strategist at ING Investment Management, The Hague, said that while mutual funds have never been as popular in Europe as they have been in the U.S., over the last six months outflow has matched inflows of the previous four years.
Indeed, he said European investors are putting their euros into money market funds instead. "We have a central bank here keeping rates at 4% to fight off inflation, so you still get some compensation on the money market account and people are very, very risk averse," said Van Tiggelen.
"Private investors have been hit twice in six years, first the meltdown in 2002 and the big decline now, and that has scared them away big time. It's likely you won't see them going back into equities strongly anytime soon," he said.
Of course, private investors overall in Europe tend to have less equity exposure to start with than their U.S. counterparts, as they usually have other arrangements for pensions and less need to use equities to build up retirement savings, he said.
Despite the apprehension, Van Tiggelen said he's trying to convey to Europe investors that in real terms they won't get any wealthier with money market funds, as consumer-price inflation in Europe at 3.3% makes for a poor return in real terms. "I'm also telling them that equities are not that expensive and many European companies have dividend yields that are as high as money market rates."
The strong euro is another problem for investors, with Van Tiggelen noting that their global fund has had a much bigger fall in euro terms than dollar terms. "That's also scaring people away. They like to go on holiday in the U.S. -- that's become very cheap -- but they're afraid to put their money in the U.S. because they don't know where the dollar decline will stop," he said.
However, he is advising portfolio managers at ING to gradually move from Europe to U.S. exposure -- where he likes defensive positions like staples, telecoms and utilities. As for those European investors looking for a bit more risk, he advises global investment grade bonds and high yield bonds, which he said are as cheap in the U.S. as in Europe.
Buy American
UBS's Hatheway is also advising investors to look at U.S. stocks right now, noting that valuations in many parts of those markets look more attractive than they do in Europe. "We also think that markets haven't yet fully discounted the kinds of growth slowdown and earnings deterioration we're likely to see in European markets, particularly in light of the effect of European earnings that come through on the strength of the euro."
By the summer months, he expects the effects of euro strength on European companies will be pushing through more clearly. "On the other hand, U.S. companies accruing revenues in Europe are likely to report some fairly nice figures...largely because they've been able to take earnings in Europe and translate them into a weaker dollar. Those factors will help support the U.S. equity market."
Hatheway said the preference is for U.S. stocks that are exposed to the world economy. "We do not yet recommend moving back into global equity markets given the highly uncertain financial backdrop and the risks of a broader slowdown in economic and earnings growth."
In their overall portfolio strategy he said the recommendation is for a "cautious strategy" of holding bonds and in their global portfolio they prefer holding bonds outside of the U.S. in countries that are likely to see stronger currencies, such as the U.K., Europe and Australia, where interest rates are higher.
"A rather unfortunate cocktail of things has investors pretty skittish, which is why they've moved into safer, low-yielding government bonds of the world," said Hatheway.
'A rather unfortunate cocktail of things has investors pretty skittish, which is why they've moved into safer, low-yielding government bonds of the world.'
Larry Hathaway, UBS Investment Bank
Andrew Popper, London-based chief investment officer of SG Hambros Private Bank, said he sees more European investors seeking out alternative investments in hedge funds or structured asset managements to replace the equities they're exiting. Those structured products can be indexed to the price of gold or oil, or allow you to benefit from a rising market or one trading in a range, he said.
"Structured products are becoming very important, and there's less risk in the sense that capital is either 100% guaranteed or protected," he said. Of course, capital protection only kicks in at maturity, so investors cannot get out earlier than the product matures.
U.K. investors pull in
Some advisers said the U.K. investment space looks even riskier than Europe's, with that economy much more at risk to fall into a recession than continental Europe.
Mark Dampier, head of research at Hargreaves Lansdown, an independent financial adviser in the U.K., said with the volatility of the past year or so investors in Britain have been falling into two categories. At one end, they're putting money in BRICs (Brazil, Russian, India, China) or commodities and resource stocks like BHP Billiton Ltd. BHP or Rio Tinto RTP.
"If they're not doing that, they're sitting in a lot of cash, and it has increased," he said. Much like Europe, U.K. banks and savings and loans are getting more money from retail investors, with official interest rates currently at 5.25%, though many expect they will be moving down.
Dampier said the public has also been going to distressed areas, buying financials like Barclays PLC BCS, Lloyds TSB Group LYG and Royal Bank of Scotland Group PLC RBS. "They are perceived as being much cheaper and the fact is share prices are already kind of discounting a recession of the 1990s proportions, so the argument is among private clients that it's kind of worth the risk," said Dampier.
He doesn't necessarily agree with that view, however, with the amount of deleveraging going on and banks unsure of values.
Dampier also thinks that some investment-grade corporate bonds look compelling in the U.K. "Corporate bonds are priced for a great depression ... credit is beginning to look like an interesting buy. A better clue is that private investors want to sell it, rather than buy it."
|