I still get the impression that despite the general positive sentiment for equities, investors underneath remain highly skeptical of over committing to the asset class. I pointed out yesterday that in the first week of February global equity funds saw large outflows, during the recurrence of emerging market fears. Investors continue to show an inclination to run for the hills at the first sign of trouble. January, as it traditionally does, saw continued equity inflows, reasserting the view that investors were starting to fall in love with equities again, after the strong performance of 2013. Investor’s talk about looking for dips to buy into, but actions suggest they do the opposite.
Merrill Lynch’s latest fund manager survey indicates cash levels have risen not fallen as a result of the correction, a further sign of healthy skepticism amongst equity funds. The report states that the equity holding by fund managers has risen to 4.8% from 4.5% since the previous survey. Another example of fear still existing within equity investors, historically US balanced funds recommend a weighting of 60-65% equities, at present they recommend just over 50%.
On Tuesday it was announced that UK inflation had fallen below the Bank of England’s target of 2% for the first time in more than 4 years. This latest fall, in my view, must only add to the attractiveness of equities. The real return as measured by the difference between inflation and the FTSE 100 dividend yield currently stands at 1.7%. That is obviously making the assumption that dividends can be maintained. Once again Tuesday’s inflation data only goes to reaffirm my view that the Bank of England will be in no hurry to raise interest rates, even if Wednesday's employment data shows UK unemployment reaching the Bank of England's target of 7%. Gilts yields fell after the inflation numbers, the ten-year gilt now offers a yield of 2.75%, investors can still get a better real return on equities than they do on gilts.
The stats say we get on average three pull-backs a year in the region of 5%, last month by my reckoning was the first we have had in almost a year. Whether that means we will get more than three this year I don’t know. On the other hand if last year comes close to repeating itself, those who wait for the pullbacks could have a long wait, and performance may suffer as a result.