Macro `Obsession' Means No Stand-Out Market for Edinburgh Funds
When Bill Dinning attended a real estate conference in London a month ago, Aegon Asset Management’s head of investment strategy was struck by how little the audience seemed to care about the market.
The “obsession” about the economy is obscuring the increase in corporate profits and what’s going on with stock, bond, credit and property markets, Dinning said.
“At the end of it, all the questions were about the macro” environment, Dinning said in an interview at his office in Edinburgh. “One hundred and fifty property investors aren’t thinking about do I want to buy the Paris market or the Berlin market, they want to know what’s going on in macro land.”
Strategists in the Scottish capital covering about 510 billion pounds ($814 billion) of funds are busy figuring out what to do next as debates over inflation, monetary policy in the emerging markets, the U.S. budget deficit and sovereign debt in Ireland and Greece drown out talk about valuations.
U.S. stocks are returning more than junk bonds after trailing them for a decade and equity prices have fallen to a low relative to credit markets. The discrepancy is making little difference, with investors withdrawing record amounts from equity funds, according to LPL Financial Corp. in Boston.
“The problem is the appetite for taking risk,” Mike Turner, the Edinburgh-based head of strategy at Aberdeen Asset Management Plc, said in an interview at his office. “We’re smack bang in the middle of euphoria and panic.”
Scottish Widows Investment Partnership sold commercial property in recent months, as well as government bonds and some U.K. stocks, to realize gains, Ken Adams, its head of strategy, said in a Nov. 8 interview. He said the changes were across a range of funds. He declined to single out individual stocks.
Standard Life Investments reckons real estate is the cheapest asset class, while credit is “a little cheap,” said Andrew Milligan, its global strategist. He predicts a 20 percent return over three years for commercial property, in line with gains for company bonds.
“You get a nice long-running yield, depending on the building,” said Milligan, whose firm oversees 154 billion pounds. “The situation for credit still looks good. It’s a reflection of our pessimism on the economy, our optimism on corporate earnings and our value analysis that says corporate bonds are not yet expensive.”
Milligan said the wild card for next year includes the U.S. budget and China.
The White House budget office projects the federal deficit this year will exceed $1.5 trillion, or 10.6 percent of gross domestic product, and will remain as high as $751 billion, or 3.9 percent of GDP, in five years.
China, by contrast, on Nov. 19 ordered banks to set aside more reserves for the second time in two weeks, draining cash to curb inflation and reduce the risk of a bubble in the world’s fastest-growing major economy.
“The one assumption that pretty much everyone bases their forecasts on is that China won’t suffer any major problems next year,” Milligan said in an interview.
Then there’s rising bond yields and debt financing pressure in Ireland, which is following Greece in resorting to a rescue by the European Union and International Monetary Fund after its banks teetered on the brink of collapse.
The difference in yield, or spread, between 10-year Irish and German bonds of similar maturity narrowed nine basis points, or 0.09 percentage point, yesterday to 533 points. The spread has doubled since the week when Greece agreed to a 110 billion- euro ($150 billion) package of loans from the EU and IMF in May.
Stocks vs. Credit
Aegon, manager of 43 billion pounds of assets, sold corporate bonds at the end of September to buy stocks with higher dividends, said Dinning, who in August predicted equity markets would rise for the rest of the year.
Equity is still cheap relative to debt, he said on Nov. 3. He didn’t specify shares of which companies he purchased.
The MSCI World Index of developed market stocks has climbed 20 percent, including reinvested dividends, in the second half of this year. The Barclays Capital Global Aggregated Corporate Index returned 7.6 percent in the same period. Junk bonds have returned 11.4 percent since June 30, according to Barclays’ Global High-Yield Index.
Scottish Widows, which oversees 146 billion pounds and is part of Lloyds Banking Group Plc, hasn’t yet redeployed the money it raised from selling investments, Adams said.
“I don’t think there’s anything that stands out,” he said. “There’s a lack of sustainable growth that’s pervasive. We’ve become less aggressive taking account of the risks. We are positive, just less positive than we were.”
For Turner at Aberdeen Asset Management, changing his asset allocation is difficult for the same reason. Like Milligan at Standard Life, he sees the wisdom of holding property and credit for the rental yield or bond coupon.
“It’s not really obvious that anything is standing out,” Turner said on Nov. 3. Aberdeen Asset Management, based in northeast Scotland, oversaw 169 billion pounds on Aug. 31.
All four strategists agree that corporate earnings will improve next year. They also agree that the economic hinterland makes it trickier to navigate stock markets.
The companies in the MSCI World to have posted quarterly earnings since Oct. 7 on average have reported a 34 percent increase in net income, according to Bloomberg data. Of those, 60 percent have beaten estimates.
“There are lots of legitimate policy and macro issues to worry about,” said Dinning. “It’s just that if you looked at the world bottom up, you’d come to a different conclusion.”
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