A spectacular first half changed the asset allocation of fund companies

  • With headwinds looming, our sample of asset manager outlooks show a drastic reversal in sentiment
  • We watch the markets suddenly out of favor, and those who now come from the cold

The BlackRock Investment Institute’s decision to name its 2022 mid-year outlook “Back to a Volatile Future” seems sufficiently justified. Inflation, monetary policy tightening and geopolitical turmoil have all resulted in a trying year for investors so far, and the institute sees further challenges ahead. “We eventually expect central banks to live with inflation, but only after locking in growth,” he notes. “The result? Persistent inflation amid sharp and brief swings in economic activity. We remain pro-equity on a strategic horizon but are now underweight in the short term.

This is just one of the asset manager perspectives we analyze every six months to assess the positioning of professional investment groups, but this paragraph gives a good idea of ​​how the mood has changed since our last Evaluation. At the start of 2022, we noted that our sample of fund companies tended to make positive noises in some of the largest stock markets, while also flagging threats such as inflation and rising interest rates. . Much of the lingering positivity in equity markets has since evaporated – although a few specific areas have actually seen an improvement in sentiment. And as always, this is just one indicator of how some asset managers view the market, and could even be seen as a set of contrary signals for adventurers.

No time to rejoice

What is remarkable this time around is the extent to which fund companies have moved away from the markets that were most popular at the start of the year. This is certainly the case for the main equity region: only 25% of our sample is now positive on the United States, compared to 80% at the start of 2021. Some 37.5% are now neutral towards the region, with the same proportion adopting a negative attitude.

Sourness towards the former market leader could be due to a number of factors, from the ferocity of this year’s sell-off to the aggressive pace of monetary tightening, all of which are interrelated. Returning to the BlackRock Investment Institute, which moved from a positive position at the start of the year to an underweight in US equities, it argues that the Federal Reserve intends to “raise rates into restrictive territory”. – pointing out that the big worry now is in many ways recession rather than inflation. Although the group adds that this is partly reflected in the 2022 sell-off, cautious valuations have not yet fallen enough to reflect falling US corporate earnings.

This bearish mood has spread to other areas previously seen as a potential recovery story. Three-quarters of the sample were supportive of Japan at the start of the year, with some citing the country’s continued accommodative monetary policy unlike other developed countries. And yet, global issues appear to have taken over, with only a quarter of our current sample still overweight and half in neutral territory. JPMorgan’s multi-asset team, which turned positive to negative during the period, warned that slowing growth could be a headwind for cyclical markets such as Japan, although yen weakness could prove a relief “unless (or until) the Bank of Japan abandons quantitative easing”.

In another area, the waning enthusiasm probably has more to do with region-specific issues. Often an unloved region, even in good times, Europe has definitely fallen out of favor this year. Three-quarters of the sample took a negative view, with no company taking a bullish stance. With the ongoing war in Ukraine, a looming energy crisis, and European economies and businesses under severe pressure, there is an argument that the weakness in stock prices already seen this year has yet to continue.

Elsewhere, the change is less dramatic. Positivity towards the UK has faded slightly, perhaps echoing some investor concerns that a market buoyed by commodity exposure may see its tailwinds lessen over time . But there has been no drastic change here.

Still, there are some unloved regions that have somewhat returned to favor. Sentiment has eased ever so slightly in both Asia and the emerging markets in our sample, and while some groups are dividing China into an autonomous region, some companies believe that pain relief in the second global economy could lead to a brighter second half.

Take Fidelity’s multi-asset team, which notes that economic metrics offer some hope after tough times. As they put it: “Economic activity monitors in China show that the worst is probably over”. It would certainly be a relief for investors who have suffered another Covid-related downturn and the volatility induced by the regulatory crackdown of 2021.

Some of this has no doubt started to sink in: it’s worth noting that dedicated China trusts no longer seem as “cheap” as they used to be fairly recently, relative to their own history. names like Fidelity China Special Situations (FCSS) still see their stocks trading at a steeper discount to net asset value than the 12-month average, but at a significantly tighter discount than the peak in the same period.

The tables are turning for bond investors

With the end of 2021 dominated by inflation fears and the threat of monetary tightening, an unsurprisingly unloved asset at the turn of the year was government bonds. This caution seems well justified, as these bonds have been selling alongside equities ever since. The yield on a 10-year U.S. Treasury note, which moves inversely to the price of the bond, rose from around 1.5% at the start of 2022 to over 3% by late spring before to fall a little more recently. In the UK, 10-year gilt yields followed a similar path from a lower base.

But a combination of higher yields and recession fears has drawn some investors back to government bonds, albeit temporarily. This shift in sentiment can be seen from our own sample: 70% were negative on government bonds at the start of 2022, but now a slightly higher proportion than that have taken a neutral view. If that’s not an overwhelming endorsement, it’s a sign that government bonds are no longer almost universally viewed as an asset to be avoided altogether. Similarly, some 62.5% of our sample is now positive for investment grade corporate bonds – the same proportion that was negative for the sub-sector earlier this year.

On the other hand, we can see sentiment weakening especially on high yield bonds, which are more resilient to interest rate changes but vulnerable to economic downturns and the corresponding risk of corporate default on their debt. After many years of strong returns, a majority of our sample currently hold a negative view of high yield, and others may well join them if economic conditions deteriorate further. As we’ve said before, investors who use strategic bond funds – which typically deal with corporate and high-yield debt – would do well to see exactly which areas of the fixed-income universe are the better represented in their chosen portfolio.


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