24/11/2009
By Sophie Baker
European institutional investors still favour equities, despite market volatility, shows J.P. Morgan Asset Management's European Equity Survey.
Sixty-one per cent of institutions said they have not changed their target equity allocation recently, despite adverse equity market conditions, although market volatility remains a key concern for the next year.
For the coming year, 44 per cent of participants said they were confident that large cap stocks will outperform small caps, and over half said global emerging markets will be the best performing sector, followed by Asia ex-Japan.
Although results varied depending on country, pension funds and life companies across Europe, excluding UK, tended to favour conservative portfolios with an average of 29 per cent of target allocation in equities, 57 per cent in fixed income and cash, and 13 per cent in alternative assets. UK institutions allocated an average of 56 per cent to equities, 31 per cent to fixed income and cash, and 14 per cent to alternatives, which J.P. Morgan commented made for a riskier portfolio.
"The fact that institutions expect large caps to outperform suggests they are not expecting a conventional market recovery next year," commented Karsten Stroh, head client portfolio managers for European equities at J.P. Morgan Asset Management.
"Traditionally, in the early stages of economic recovery, small caps tend to rebound strongly. This would suggest institutions expect a prolonged 'flight to quality' in equities."
Peter Schwicht, head of institutional business in Europe for J.P. Morgan Asset Management, added: "Although each country differs slightly in their market and allocation views, there is little evidence to suggest that events over the past two years have deterred European institutional investors from equity investing in any significant way. The greater changes are likely to be in how institutions look to achieve equity returns and the investment approaches they will seek out among their chosen managers. Simplicity and transparency are still paramount although investors still appreciate the importance of a diversified portfolio."
The survey was conducted amongst 194 European institutional clients.
Meanwhile, ING Investment Management agreed that emerging markets will be the ones to watch for the next year.
At its Annual Outlook Conference today (24 November 2009), ING said it predicts that emerging markets will continue to outperform developed ones based on superior growth dynamics and ample liquidity, as well as a preference for risky assets over risk-free assets.
"Our core investment theme is that investors will seek high, sustainable growth complemented by yield support in what we expect will be a low-growth, low return world," commented Eric Siegloff, head of strategy and tactical asset allocation at ING IM. "The importance of yield in a low-return environment leads to a preference for large capitalisation, quality, high dividend strategies in equity markets and higher-rated spread products in fixed income markets."
The biggest risks that the markets will face next year will surround a withdrawal of quantitative easing, a move to higher policy interest rates, volatility in oil prices, impetus for financial sector regulation, and how governments will manage fiscal policies.
