Market protagonists believe equity markets climb a wall of worry. This wall still has plenty of bricks for equities to climb. The only change, is that sentiment has improved measurably as fears for global equities has now turned into a wave of triumphism.
Some of the bricks include the two largest economies in the world likely to tighten monetary policy, along with Europe facing further problems with its banks, and Greek debt relief. The civil war in Syria continues to make headlines, increasing tension between Russia and the rest of Europe. The UK carries on to debate Brexit, bond investors have been selling, and the US dollar has been rising. One asset price move that has gone unnoticed is the value of the Bitcoin, which has almost doubled in the past 12 months.
The latest Merrill Lynch fund manager survey records that cash held by fund managers, has fallen below 5%. Not only is cash being invested, but the allocation of where it goes is changing. We have been expressing the view in recent blogs, and within the broader media, how the change in the US president is likely to change sentiment towards US and European equities among fund managers.
Over the past 2 years’, Merrill Lynch fund manager surveys have suggested investors favoured European companies over US ones. Believing that European companies had better prospects for earnings growth, combined with a more liberal monetary policy. Not unsurprisingly they were wrong. With the anticipation of more liberal US tax policies, we expected fund managers would now throw the towel in on European equities, as the problems in the region show no sign of improving.
The latest fund manager survey would appear to confirm this opinion. Allocations of US equities are at a 2-year high, and just 4% of those fund managers interviewed intend to be overweight Europe. With this track record who would bet against European equities outperforming US ones in 2017?
When one is coached to captain a cricket team, the first thing you are taught is not to follow the ball. Don’t put fielders where the ball has gone but where you expect it to go. Fund managers started the year underweight value and overweight growth, where the ball had been going despite the valuation gap. As value, has outperformed growth this year, fund managers now favour value, the direction the ball is now going in.
Equity markets do feel as if too much optimism is baked into 2017, at this moment. The question is will Santa’s imminent arrival be enough to keep the rally going into the year end?