Mirable Dictu! Global Investors Overweight US Stocks

Before you break out the champagne on the news that international investors like the US (or more accurately, hate its stocks less than those of other nations), the article does not address the weighting of equities relative to other asset classes (ie, total allocations could still be down due to shifting more capital to commodities, bonds, or even plain old cash). The relative allocation to the US could be up with the absolute amount invested down.

The article also does not say what proportion of the funds surveyed hedge their currency exposure (certain . Many of these investors presumably do, either on a fund by fund basis, or across all funds (some, of course, take a point of view in their currency overlays). I’ve always wondered how well hedging works for equities in practice, given that the portfolio value changes frequently due to changes in market prices and investor withdrawals/contributions, and that the timing and amount of dividends can change based on trading within the portfolio.

From the Telegraph:

Fund managers across the world are dumping stocks and retreating to cash in a mood of extreme pessimism, fearing that the looming economic crunch is an even greater threat than inflation.

The latest survey of investors by Merrill Lynch shows that an unprecedented 41pc now think that a world recession is either likely or very likely. The majority dismiss hopes of double-digit earnings growth next year as “fantasy”.

“People are a lot more scared about the macro-outlook. The survey has never seen anything like this before since it began a decade ago,” said David Bowers, the organiser of the report.

“Recession risk has taken over from inflation risk. Fund managers believe the global economy is deteriorating so fast that a wage-spiral is never going to happen, at least in developed markets,” he said. The survey is based on 191 funds managing assets worth $610bn (£305bn).

The US is emerging as the one bright spot in the global gloom, despite the credit mayhem. A net 7pc of investors are overweight in US equities, clearly betting that most of the bad news is already in Wall Street prices. The figure was negative in May…..

“The US has now become the country of cheap manufacturing. You’ve got 20pc wage inflation in emerging markets so FDI (foreign direct investment) is flowing back there,” said Karen Olney, Merrill’s chief European equity strategist.

The investor love affair with India, China, and Asian markets over the last nine months has turned sour.

“That trade is off,” said Mrs Olney. A net 75pc are underweight Indian equities as the country’s inflation reaches double digits. Chile (-69), Taiwan (-50), Korea (-50), Malaysia (-44) are not far behind.

Mr Bowers said investors had woken up to the nasty reality that emerging markets have let rip with inflation and will now have to jam on the brakes.

Those with dollar pegs or dirty floats like China have, in effect, been “destabilised” by the US Federal Reserve’s rate cuts….

Russia (+75) remains the darling of the emerging universe, but for how long? Almost two thirds of investors say oil is fundamentally overvalued…..

A net 42pc think the Bank of England has kept interest rates too high given the housing slump and the consumer squeeze…

Europe is not faring much better. Some 96pc think the economy will get worse over the next year, up sharply from the June survey. A majority believe inflation will fall, and a net 24pc say the European Central Bank is engaging in overkill. Not surprisingly, a record 32pc are now underweight eurozone equities…

Japan is sneaking back into favour after years in the wilderness, if only by default. “Japanese banks are the winner from the credit crunch. Japan now has the capacity to be the monopoly supplier of capital to the world once again,” said Merrill Lynch.

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  1. Anonymous

    Didn’t I just read today (sorry, don’t recall where) that the P/E of U.S. stocks is about 20, while the MSCI world index (ex US) has a P/E of around 11?

    Guess those US overweighters are technicians rather than fundamentalists. Or else they can’t resist the fat 15% dividend yield on Fannie Mae!

    Of course, the BKX launching 17.27% (the biggest single-day pop ever) does suggest a break in the pervading pessimism.

    In BubbleLandia, you’ve got to be light on your feet. Float like a butterfly, sting like a bee. We be No. 1!

  2. Matt

    Ok, so can anyone explain the fundamentals behind today’s piling into financials and out of oil and extractives? Seems perverse. I thought M Whitney of Oppenheimer made a great case on bloomberg tv yesterday morning, that the scene was looking bad, on fundamentals. My case for some time is that the recession would be a “jagged U”. I think we’re seeing an upjag, to be followed by verticals down, then flat, and nasty all along the road.


  3. Anonymous

    Some of the “piling in” on financials may be due to the SEC release today heightening scrutiny on naked short positions (where the underlying is only “located” rather than actually borrowed). From a recent law firm research report: “The SEC issued an emergency order, affective Monday, July 21st , to enhance investor protections against “naked” short selling in the securities of Fannie Mae, Freddie Mac, and primary commercial and investment bank dealers. Individuals seeking to make a short sale in these securities must arrange to borrow [ed. not merely “locate” or have a “good faith belief that they can be borrowed”] the securities and deliver them at settlement. The SEC is also expected to create rulemaking to address these systemic issues. Broker-dealers will be required to institute special short selling procedures as to these securities and all firms should be particularly sensitive to fails in these securities.”

    It’s also option expiration week, always good for an interesting ride.

  4. Anonymous

    Look out, Wall Street. Not all of the foreign investors want to BUY. Here come the peasants with pitchforks! Excerpt from Bloomberg:


    July 17 (Bloomberg) — Pakistan stock investors threw stones and smashed windows at Karachi’s stock exchange to protest the worst losing streak in at least 18 years, prompting intervention by the police and paramilitary officers.

    Hundreds of investors walked out of the trading hall after the benchmark Karachi Stock Exchange 100 Index fell for a 15th day, extending a slump that has wiped out $30 billion of market value in three months.

    “I have lost my life savings in the last 15 days and no one in the government or regulators came to help us,” said Imran Inayat, 45, a protester and a former banker who retired early and says he lost 300,000 rupees ($4,175) on the market.


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