Dubai: The negative factors to counter in equity markets are many: pricey valuations, growing geopolitical uncertainty and reversal of easy money policy, but none of these seem to deter investors from pouring in more money.
According to a Bank of America Merrill Lynch’s fund manager survey of 178 participants with $533 billion (Dh1.9 trillion) of assets under management, a record number of fund managers are taking higher than normal risk even as their cash levels fell to 4.4 per cent, the lowest since October 2013, from 4.7 per cent with record high (net 16 per cent) of investors say they are taking above-normal levels of risk in their investment.
“Icarus is flying ever closer to the sun,” said Michael Hartnett, chief investment strategist, Bank of America Merrill Lynch, “and investors’ risk-taking has hit an all-time high. A record high percentage of investors say equities are overvalued yet cash levels are simultaneously falling, an indicator of irrational exuberance.”
- Nadi Bargouti | Managing director, head of asset management at Emirates Investment Bank
The allocation to equities has risen in November to 49 per cent overweight, the highest since April 2015, according to the survey.
Positioned for reversal
“We are positioned for a reversal in trend. Once we receive confirmation we would turn cautious. All fundamental indicators are giving us a sell signal, but there is still momentum left if we follow the technical signals. Once the technical indicators confirm the fundamentals, we will start trimming US exposure,” Nadi Bargouti, managing director, head of asset management at Emirates Investment Bank, said.
The S&P has been on a record breaking rally, finishing October with 2.3 per cent gains. This makes the US equities the best performing markets globally, after having accumulated gains of more than 22 per cent. The US markets have been positive for all 10 months of this year, the first time this has happened in the 90 years.
EIB, whose exposure to US equities is 5 per cent below that of the benchmark, is looking to cut US exposure in coming months. But in case of any correction, the good old diversification strategy stands flawed.
“There is a problem with diversification. The concern with US equities is that they are heavy weight. The indirect impact on other global equity market will quite significant. The benefit of diversification in times of stress becomes less relevant. Unless they have a strong conviction signal, We play it on the basis of selection than broad based approach,” Bargouti said.
Still positive
But UBS is still positive on US markets.
“We believe the uptrend in corporate profits remains well-supported and should continue to underpin our global equity overweight,” Mark Haefale, global chief investment officer at UBS said.
There are other positive factors supporting equities.
The OECD is forecasting the fastest pace of growth since 2011, with all 35 member countries expanding, while the US recently posted back-to-back quarters of 3 per cent GDP growth. Business confidence is high. The October ISM manufacturing purchasing managers’ index eased back from September’s 13-year high, but remains strong.
But the risks are different from those seen earlier.
“Market volatility has reduced but that does not mean there are no risks out there. Instead of being macro in nature, they are now more idiosyncratic: geopolitical, political and policy error related,” said Vinay Pande, Managing Director-Global Head of Trading Strategies at UBS “Smart investors need to address these risks individually now. All purpose hedges have to be used more judiciously now as they could prove to be inefficient,” Pande said.
