PSI Research release report regarding European economy

1888 Press Release - Emerging markets are still a long trade for global fund managers, with relative positioning of these yet to be developed markets hitting the highest level since February 2013.


Emerging markets are still a long trade for global fund managers, with relative positioning of these yet to be developed markets hitting the highest level since February 2013.

The PSI Research global survey involving 171 fund managers, holding $443 billion in assets, showed asset managers are keeping their cash holdings at 5.8 per cent, which is highest since the Brexit vote (June 2016) and 9/11 attacks (November 2001).

The survey was conducted at the beginning of October this year. Their allocation to equities improved to a seven-month high with 11 per cent of the participants turning overweight on stocks. Allocation to bonds declined to a 10-month low. The survey suggested that investors have turned bearish, "But lower cash/risk rally awaits trust and certainty in US/EU politics," it said.

Among other key takeaways were a good and slow rise in bond yields (but no crash) and a clear EPS upswing, it showed. Tail risk is a form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution.

Here are the biggest global tail risks* that were listed in the survey.

(*- Tail risk is a form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution. Tail risks include events that have a small probability of occurring and occur at the ends of a normal distribution curve.)

Disintegration of the EU:
British PM Theresa May recently jolted financial markets after she said Britain would begin the process to leave the EU by the end of March. About 20 per cent of participants in the PSI Research survey called EU disintegration as the biggest tail risk to financial markets. There remain fears that after Britain's exit from the EU, some more nations from the union may opt to walk alone.

Crash in bond market:
Rising credit spread was the biggest risk for 18 per cent of participants surveyed. It showed allocation to bonds has declined to a 10-month low. As many as 76 per cent of the participants believed bond prices were frothy and 50 per cent have turned underweight on bonds against 45 per cent last month. As many as 31 per cent of the investors expect yield curve to steepen. This is the highest percentage since June 2014. Combined valuation of bonds and stocks at 55 per cent was at an all-time high.

Trump presidency in US:
If you think fears regarding chances of a Republican win in the forthcoming US elections are overstated, then consider this. A total of 17 per cent in the survey saw Trump winning the election as the biggest risk for financial markets. In case the Republican actually wins the election, the most popular trade would be long volatility (53 per cent) and short Mexican peso (22 per cent) and short bonds (12 per cent).

US inflation:
12 per cent of the participants see US inflation as the biggest tail risk. Data showed US consumer prices saw the biggest jump in five months in September, led by a rise in rent and fuel prices. The Fed has an inflation target of 2 per cent. Speculation was rife that Fed Chair Yellen was willing to let inflation run above the Fed's 2 per cent target and keep an easy money policy.

Tapering by ECB/BoJ:
Tapering by global central banks, including the European Central Bank and the Bank of Japan, is a concern that fund managers share with each other.

"I think sooner or later if the global economy shows signs of strength, you will see the Fed want to raise rates and you will see the ECB get into a tapering mode. We have already seen the Bank of Japan being forced to change its approach because it is running out bonds to buy,"

"So, there is a lot that is going to change from the monetary policy perspective globally and, therefore, you may actually see some increase in choppiness in the coming months," Alex Taylor, Senior Portfolio Manager, PSI Research, concluded.

http://www.psi-research.com


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by Donald Hood (few years ago!)

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