Abu Dhabi: Uncertainty in the global macroeconomic environment has turned investors cautious and more vigilant, translating to continued massive inflows into the bond and gold markets, which are seen as low-risk safe havens.
According to a recent report from Bank of America Merrill Lynch, a massive $13.4 billion was allocated to gold over the past 11 weeks — the largest sustained weekly inflow since spring 2009.
Bonds were also in the limelight, with $5.9 billion in inflows. The report said that there were $69 billion worth of redemptions from Money Market Funds over two weeks in mid-March — the largest two-week cash redemption since July 2011.
Vijay Harpalani, fund manager at Al Mal Capital in Dubai, said that excessive risk-taking will not be adequately rewarded, at least in the medium term, which is turning investors away from equities. “Asset allocation has been an extremely challenging exercise this year, given higher volatility and uncertainty on the macro front. We believe it is appropriate to adjust tactical asset allocation more frequently than is normally required. Back in mid-2015, we were selectively overweight on equities but were underweight on bonds. This year, we have tactically over weighted bonds and cash,” he said.
Harpalani said that the divergence between the US Federal Reserve and the European Central Bank has made a good case for investing in bonds.
“While gold is not an income-generating asset, it has gained prominence as a hedge against inflation, and is also helped by lack of other major liquid asset classes for diversification. We continue to be overweight on bonds and selectively overweight on equities. Capital preservation products could also see an increase in allocation, especially when the risk aversion seems to have increased,” he said.
Emerging markets
Away from asset classes, emerging markets saw the largest weekly equity inflows since July 2015, with $3 billion going to its equities. Debt inflows saw a similar trend, reaching the largest weekly figures since June 2014 ($1.4 billion), Bank of America Merrill Lynch said.
Saleem Khokhar, head of fund management at the National Bank of Abu Dhabi’s asset management group, pointed that 2015 was a difficult year for emerging markets as investors preferred allocation in developed markets.
This was primarily supported by the drop in oil prices, which put pressure on governmental revenues.
“In the early part of this year and towards the end of last year, we saw lots of renewed interest from institutional clients towards the Mena (Middle East and North Africa) and the UAE markets. Oil prices are still a challenge, but we are expecting some growth. The question is how much is actually factored into the price of equities and what are the steps that are being taken to address the challenges that we face,” Khokhar said.
Factors like long-term forecasts for oil prices showing an increase, GCC governments announcing structural reforms to counter lower oil prices, and the GCC’s equity markets having already plunged in 2015 have helped renew interest in the region’s markets.
Given the negative sentiment that dominated much of 2015, Khokhar said it was no surprise that investors, especially those with low volatility appetite, were shifting their gaze (and assets) towards bonds as they offer more certainty in terms of returns. “I would expect fund flows to pick up, and I would expect the worst part of the growth slowdown to be over within a year or a year and a half … so, longer term investors are probably turning positive. I think retail investors are waiting for a little bit more concrete evidence on economic growth,” he said.
Defensive asset classes
Similarly, Sebastien Henin, head of asset management at The National Investor, said that equity markets in the US were now overvalued, with the country’s markets having had a bull run over the past few years.
Emerging markets are also facing their fair share of challenges, given the uncertainty in their economies, strong reliance on commodities, and a depreciation of their currency.
“I think in the equity space, it’s a tricky question, and someone who is cautious would avoid this asset class in the current environment. All investors want to have a small allocation in gold because it’s like having insurance in a time of crisis.
I think if there’s one asset class that might be in demand these days, it’s hedge funds — alternative investments, because they can reward investors with attractive yield. If you look at the risk in this asset class, it’s not bad at all,” Henin said.
He expected investors during 2016 to allocate assets to what they perceive as defensive classes such as gold, alternative investments, and cash.
