If they had to manage a portfolio according to a fairly balanced reference allocation (50% shares/50% bonds), managers would currently invest, on average, 50% of their assets in shares, 43% in bonds and 7% in cash. This slight preference in favour of shares is based on encouraging prospects for emerging and, to a lesser extent, American markets over the next six months.  However, for the 80 international management companies that answered our survey in January on half-yearly prospects for traditional asset classes, corporate paper is credited with the best performance prospects.  Anticipating a tightening of spreads of European and American issuers over all notation categories, managers are considering reinforcing the credit in portfolio theme in the first half-year.  The interest in corporate bonds is in contrast to the negative feeling with regards to the sovereign debt of developed countries.  The proportion of managers who underweight this class of assets in portfolios should again increase by the end of June, despite the support for sovereign bondholders that banks' and insurance companies' new prudential rules promise to bring about.

Share portfolio

With the notable exception of the American market, practically all Stock Exchanges ended 2011 in negative territory.  At the start of 2012, they were the subject of variable expectations depending on the geographical zone.  Having  recorded encouraging performances in January, the recovery of European equity markets should continue during the first part of the year.  For managers, the Eurostoxx 50 (reinvested net dividend) will be up by 3% in the first quarter then level off until June.  "The increase of the beginning of the year expresses a newly-found hope sparked off by the ECB's latest measures aimed at supporting the banking sector (and indirectly sovereign debt) and the publication of favourable macro-economic data concerning the American economy in the fourth quarter," says Federal Finance.  "However, these measures do not represent a lasting support factor.  As their impact subsides, the economic recession in Europe will weigh negatively on equity markets," they add.  BNP Paribas Investment Partners also anticipates "a return of preoccupations in the euro zone and a worsening of economic prospects on developed markets".  Swiss Life AM wonders: "Can developed countries make the necessary budgetary adjustments without impeding growth?"  The international monetary fund (IMF) visibly doesn't believe so, since it has just revised its growth anticipation in the euro zone down for the present year, from 1.1% to -0.5%.  In this morose European context, a handful of managers nonetheless single out the German equity market, which they classify among their favourite investments for 2012.  

Carried by the stronger growth prospects of the American economy (1.8 % in 2012 according to the IMF), US equity markets should outperform their European counterparts.  The S&P 500 index (reinvested net dividend) is expected to be up 4% in the first quarter and 5% over the whole of the first half-year.  Among the key variables of stock exchange evolution across the Atlantic, Argent Sector cites "Washington's choices in terms of public spending" before the presidential ballot in November.  But like previous half-years, emerging countries are again sparking most expectation.  Upward forecasts of rates only partially reflect this interest.  While the MSCI EM index (reinvested net dividend) is expected to be up 5% in the first quarter and 7% by the end of June, 52% of managers  are considering being overweighted on the theme by the end of June.  The figure is compared with a net balance of 23% of overweighted managers at the beginning of January.

For Allianz Global Investor, "emerging shares combine reasonable levels of appreciation, coupled with dividend forecasts higher than those of developed shares".  The IMF is banking on a slowing down of growth and inflation in 2012 (to 5.4% and 6.2% respectively as opposed to rates of 6.2% and 7.2% in 2011).  Accordingly, Martin Currie is expecting a relaxing of monetary policies in emerging countries so as to support equity markets in an environment marked by lower inflation pressure. There are also many managers mentioning future Chinese decisions regarding monetary policy among the catalysts having the most influence on market evolution.

Source: bfinance, Fund Manager Strategy Survey, January 2012

Sovereign debt

The euro zone crisis will remain the major preoccupation of financial markets over the next few months.  At the end of January however, bond markets have clearly reduced their expectations of the euro zone being dismantled beginning with a default by Italy, before causing Spain's and then France's exit.  For Axa IM, the inherent probability of Italy leaving the Euro has gone from approximately 30% at the beginning of December to approximately 10% the 27 January.

After having reduced their exposure to European sovereign debt considerably, managers will gradually revise their opinion regarding the obligations of States in the euro zone.  The net balance of underweighted managers on bonds in the euro zone will go from 47% at the beginning of January to 29% at the end of June.  Sovereign debt in Euros, which is the focus of everybody's attention, will be the only one among developed countries to benefit from relative renewed interest.  The net balance of managers who are planning to underweight American debt by the end of June reaches 62%, as opposed to 25% who declare they will overweight it at the beginning of the year.  For British and Japanese debt, the balance emerges at 47% and 37% respectively, compared with the levels of 41% and 29% in January.

Emerging debt goes from a net underweighting of 3% to an overweighting of 19% at the end of the half-year.  Emerging debt portfolios are also the only kind in the last six months to have seen, more often than not, their duration being extended rather than shortened.  In fact, contrary to the debt of developed countries, managers are currently tending to maintain a duration of their emerging debt portfolio that is longer than their reference index.

In terms of performance, by the end of June the managers' consensus anticipates an increase in interest rates on reference sovereign issues of 19bp for the German 10year, 26bp for the British 10year and 31bp for the American year in relation to levels observed at the end of December.

Source: bfinance, Fund Manager Strategy Survey, January 2012

Source: bfinance, Fund Manager Strategy Survey, January 2012

Credit

Contrary to sovereign debt, managers are voting overwhelmingly for corporate bonds: managers are currently overweighted on all notation categories and are planning to be even more so by the end of June.  The theme's appeal is not foreign to the tightening of spreads that managers are anticipating throughout the first half-year.  In relation to levels observed at the beginning of January, the spreads of corporate obligation indices of investment category (BarCap US Corporate IG and Euro Corporate IG) should tighten by 25bp and 44bp respectively.  Those of the high yield category (BarCap US Corporate HY and Euro Corporate HY) by 65bp and 93bp.  The spreads of corporate debt in emerging countries (JP Morgan EMBI Global) are also expected to drop by 48bp in the first half-year.  Of course, these developments are sensitive to the sovereign debt crisis in the euro zone being resolved.  Managers are also pointing out the influence of economic growth, while a possible return to recession would be likely to reverse margin tightening anticipations.

Financial issues are particularly exposed to decisions relating to a possible restructuring of Greek debt.  BayernInvest Kapitalanlagegesellschaft ponders "how possible discounts on European sovereign debt will affect financial institutions and their bond issues?",  while Alliance Trust Investments evokes "Greece's chaotic default on payment".

Finally, questioned about the influence of new banking and insurance regulations may have on the evolution of financial markets, a number of managers anticipate a negative impact in the short term but expect a more positive effect in the longer term.  While BNP Paribas Investment Partners considers that regulations represent a deterrent to market development "by reducing banks' ability to buy long and risky assets", BayernInvest Kapitalanlagegesellschaft puts the pullback of banks in perspective by mentioning the existence of other large-scale investors, with sovereign funds in the forefront.  "New capital requirements, both qualitative and quantitative, will have positive implications in the long term.  In the short term, they will affect banks' loaning abilities with negative consequences for economic growth and equity markets, but positive for bonds," analyses Premier Fund.  "Reinforcing regulations will increase capital costs for banks and therefore reduce their profitability.  However, markets have already integrated this evolution, with bank shares having already incurred significant discounts," points out Allianz GI.  "On the other hand, sovereign debt should be quite steady insofar as it receives favourable treatment in calculating weighted risk assets and banks are encouraged to hold liquid assets."

Source: bfinance, Fund Manager Strategy Survey, January 2012

Source: bfinance, Fund Manager Strategy Survey, January 2012

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