Big investors resist major stock sell off

By Jeremy Gaunt, Reuters European Investment Correspondent

LONDON (Reuters) - Institutional investors hung on to their equities exposure more than might have been thought in May, given extreme volatility on financial markets, but also put more money in safe-haven cash, Reuters polls showed on Thursday.

Demand for alternatives, which include gold, rose. But perhaps surprisingly in the face of regional crisis, investors increased exposure to euro zone equities. Surveys of 47 leading investment houses in the United States, Japan, Britain and continental Europe showed an average mixed portfolio holding 52.3 percent of its holdings in equities. This compares with 52.8 percent in April, but is a relatively small decline given that MSCI's all-country world stock index has fallen close to 12 percent in the period between polls.

At the same time, they cut back slightly more on bonds -- to 34.9 percent of a portfolio compared with April's 35.5 percent and put money into cash. Cash holdings rose to 5.1 percent from 4.7 percent. With the month dominated by the crisis in euro zone debt, managers in the polls, longer-term investors were not universally glum. "We expect the global economy to gradually move to a sustainable recovery path on improvements in employment and capital spending, centring on the United States. The world's share markets will likely return to an uptrend," said Kenichi Kubo, senior fund manager at Tokio Marine Asset Management.

The polls even showed relative faith in Europe, the centre of the current crisis. Allocations within equities to the euro zone rose to 23.2 percent from 22.2 percent a month earlier. Despite this, concern remained that the euro zone crisis and the government cost-cutting needed to solve it could harm future economic growth. "I do think what's happening will result in slower growth in Europe," said Steven Bleiberg, head of global asset allocation at Legg Mason Inc.

Regionally, U.S. fund managers held on to their high exposure to equities. Based on 11 U.S.-based management firms surveyed between May 18 and 26, the poll found an average of 65.2 percent of assets in equities, unchanged from April. Managers also cut bond holdings to an average of 28.8 percent in May, from 29.5 percent in April, while raising cash exposure to 2 percent, from 1.7 percent. Continental European investors lifted their cash holdings to its highest in at least a year in May and cut back on bonds.

The poll of 13 Europe-based asset management companies showed a typical mixed portfolio holding 47.9 percent of its assets in equities this month, up from 47.5 percent in April. The allocation to bonds -- which includes government bonds and corporate debt -- fell to 38.1 percent from 39.7 percent. Cash rose to 8.0 percent from 6.9 percent. Japanese fund managers slightly raised their weighting for stocks in May from the previous month's seven-year low. The average share weighting among 11 institutions edged up to 45.0 percent from 44.8 percent in April.

The average bond weighting dropped to 48.4 percent from a 10-month high of 49.1 percent in April. The weighting for cash rose slightly to 3.3 percent from 3.1 percent. British fund managers continued to reduce exposure to equities in favour of bonds. The survey of 12 fund managers showed allocations to equities dropped for the third month running, falling to 50.9 percent in the average global balanced portfolio in May, from 53.5 the previous month.

GBP position update

Took a loss on my short GBP1m position at 1.5278 (short from 1.4990) of USD 28,800.

But went long GBP1m also at 1.5278.

I figure that enough bad news is already priced in. We'll see.......

Three signs of a coming equity market correction

LONDON (Reuters) - Jeremy Gaunt, European Investment Correspondent 16 April 2010.

Signs are appearing, at least to those who like to study financial market runes, that equities could be in for a short-term fall.

Nothing is certain, of course, what with past performance being no guarantee of future returns as the standard disclaimer reads, but three different historical trends are suggesting equities could soon turn. It all has to do with eight days in March, an aversion to cash and, contradictorily, falling equity market volatility.

First, the eight days. Morgan Stanley's European equity strategy team has taken note of the fact that this is the number of times last month that MSCI's main Europe index found itself up at least 50 percent year-on-year. "This is a rare event," it said in a note. "(It) has happened on only 80 individual days since 1919." Crunching numbers, the Morgan Stanley team found that while such occurrences are a long-term bullish signal, they are bad news over the short haul. Some 77 percent of the time, equity markets have fallen 4 percent over the next six months. "The trigger for a correction is clear," strategist Teun Draaisma said. "I expect a continuation of good economic news to turn into bad market news. The gist is that continued growth prompts central banks into a policy reaction or sends bond yields and inflation expectations up.

CASHING IN
The second signal comes from Bank of America Merrill Lynch via the roughly 200 fund managers the bank polls every month to get ideas about asset allocation and market moves. April's survey, released this week, found that cash holdings had dropped to 3.5 percent of assets among the group. Looking back, the bank said that on four out of the past five occasions that cash holdings have fallen that low, equities have declined by 7 percent over the following 4-5 weeks.

"We have an amber warning light flashing," Patrik Schoewitz, BofA Merrill's European equity strategist, said of the finding. Investors' low-yielding cash reserves, which were built up to huge levels at the height of the financial crisis, have been draining away for well over a year, mainly to the benefit of riskier assets such as equities. At some point -- perhaps now, if BofA Merrill is right -- cash levels will normalise, cutting off riskier assets from some of their fuel.

The third sign of a correction is less numeric and more psychological. State Street Global Advisors, an investor with $1.9 trillion in assets under management, says it is seeing growing interest from institutional investor clients in low-volatility equity strategies, essentially protection against stock market falls.

The best time to enter such strategies, State Street says, is when volatility has bottomed out and equities themselves have risen sharply from a low, as now. The CBI Volatility Index is below last year's low and 71 percent below last year's high. The MSCI all-country world stock index, meanwhile, has risen some 83 percent from what many believe was its cycle low a little over a year ago.

CYCLICAL BULL
None of this is to say that such a correction will spread into the longer term. BofA Merrill's Schoewitz said its study of corrections following cash reserves hitting 3.5 percent "is a very short-term signal". Furthermore, Morgan Stanley notes that while days of hitting 50 percent-plus gains has led to a correction in the short term, on 96 percent of occasions it has been followed by 10 percent rise in equities over a 12-month period. The firm believes that equity markets are currently in a cyclical bull market that should continue into next year.

But for the short term, signs are there.

And now we have the Goldman Sachs fraud case depressing markets...looks like an interesting April!! - KT

Long-term investors unfazed by close-run UK election

07 Apr 10 08:30:41

By Jeremy Gaunt LONDON (Reuters)

Long-term investors do not appear overly concerned about Britain's election delivering an inconclusive result despite market wobbles about a "hung parliament". Analysts who track institutional investor flows report strong inflows into UK equities, steady demand for British government bonds and caution, rather than flight, when it comes to sterling. Fund managers, meanwhile, say investors are taking decisions on a broad range of issues, not just on the immediate potential for political uncertainty.

In short, what has been a fixation in UK media and political circles -- the rare prospect of a hung parliament in which no party has an overall majority or a strong mandate for painful measures to cut Britain's bloated debt -- is not resonating loudly with longer-term investors. "The elections are just a small part of how investors look at the UK," said Emiel van den Heligenberg, head of tactical allocation at BNP Paribas Investment Partners. "You could argue that a hung parliament is difficult ... but it should only be one of many factors. I don't see people strategically moving away from the UK."

That is not to say there will not be short-term market wobbles were a hung parliament to result from the May 6 poll. But institutional decisions -- by contrast with short-term trading -- are being driven more by issues such as euro zone weakness, the quality of UK stocks and the rise of the dollar as the U.S. economy rebounds. There is also a strong view that Britain is better placed to work itself out of economic trouble than, say Greece or Portugal, no matter what colour of government is formed.

"The UK is one of the few countries where you can expect something (in the way of austerity)," said Kommer van Trigt, bond fund manager with Robeco Group. In Reuters' late March asset allocation polls, U.S. and Japanese institutional investors actually increased their exposure to UK stocks and bonds, while continental Europeans slightly trimmed their exposure. British investors, perhaps more tuned in to domestic events, stepped back more firmly from UK assets in March. In a Reuters poll last week economists saw a median 55 percent chance of a hung parliament.

GLOBAL REACH
On the whole, investors do not appear as concerned about the election creating political stalemate as might be expected. Nowhere is this more evident than on the British stock market. The FTSE 100 is up 6.75 percent this year, outperforming most U.S. and European bourses and hitting a fresh 21-month high as Brown was preparing to call the election. A lot of this has to do with the non-UK sensitive nature of the index, which incorporates many of the world's largest and most dynamic multinationals, those most likely to benefit from a global economic recovery.

But further down the scale there have also been impressive gains that belie suggestions of concern about political uncertainty. The FTSE mid-cap index is up nearly 12 percent for the year, one of the world's best performers. The small-cap index has gained 4.6 percent. The main reason is that large investors are focusing on what they see as good value in UK stocks, not on short-term worries about politics. "We think that UK equities are very appealing," said Franz Wenzel, senior strategist at AXA Investment Managers. "Their earnings multiple is extremely low, in particular compared with the earnings growth forecasts for the next couple of years."

SHORT VS LONG
Other UK assets are not quite so immune from election jitters but still do not appear to be overcome by fears that a weak government would be unable to tackle Britain's huge debt. The 10-year UK government bond yield is higher than it was during the height of the credit crisis, but it is still relatively low given concern about a burgeoning government debt and increased supply. Simon Derrick, chief currency strategist at Bank of New York Mellon, said that flow data within the $22 trillion his bank holds as custodian or administrator, showed that far from deserting UK fixed income, investors were warming to it. "Net holdings are moving back to levels they were at in 2007," he said. "The fixed income story is pretty positive." Part of the reason, he said, was that for many investors British bonds looked a better bet than U.S. or euro zone debt.

Even when it comes to sterling -- which has been volatile as talk of a hung parliament has grown, falling 1 percent against the dollar on Tuesday -- there is more evidence that it is short-term investors at work than longer-term ones. While trading data shows many hedge funds are short sterling, fund flow analysts say the currency is holding up. "There is a recognition that sterling remains competitively priced," Derrick said. "Sterling clearly looks like a long-term relatively good buy."

Unfortunately I am starting to agree. Um......shame I am short pounds lower down. I think I will look for a dip to get them back in and actually go long, as I agree with the thrust of this story. - KT

Updated positions

Here are the trades I am active in:

AUD/JPY
Long AUD 3,735,990.04 short JPY at 82.79 average.

Current rate: 86.80
Current: Gain 401 points

Comment:

See AUD/USD comments below.

USD/JPY: The state of Japanese government finances is extreme. The new government will eventually break the self-imposed debt ceiling and prompt a credit downgrade by the ratings agencies. The recent strength in the USD will continue, pushing the USD/JPY back up towards the 100.00 area in the months ahead.

Still have a longer-term target in the AUD/JPY cross of 105.00. I am happy with the current exposure.

NZD/JPY
Long NZD 3m short JPY at average of 57.23.

Current rate: 65.70
Current: Gain 847 points.

Comment:
See Yen comments in AUD/JPY above. See NZD/USD comments below.
I am happy with the current exposure.

EUR/USD
Square

Current rate: 1.3402

Comment:
The ongoing concerns in Europe over debt will not go away. Their basic problem is that they have no central authority that funds the Euro Zone. Each government has its own finance department. Result: chaos when debt becomes unmanageable. Until sovereign debt concerns abate, the euro will remain on the back foot against the USD.

But in the long run, all other things being equal, the Euro Zone debt position is far better than the US. If the US does not move to reduce the budget deficit over time, then the USD will become the next Greece eventually (after the UK!).

I still believe that Europe will raise interest rates before the US does. Watch the inflation readings, Europe is already seeing some inflationary pressures in some German states.

GBP/USD
Short GBP1m long USD at 1.4990

Current rate: 1.5150

Current: Loss 160 points.

Comment:
The UK election has been announced. This will be a volatile time for the GBP/USD. The UK debt load is staggering, with a credit downgrade only a matter of time. Whoever wins the election it will be a poisoned chalice. It may be that the IMF is eventually called in as well. Either way the pound is under steady selling pressure, with my longer term target 1.3000.

Will review on a break above the 1.5500 level.

AUD/USD
Long AUD 2m short USD at 0.8670.

Current rate: 0.9250
Current: Gain 580 points.

Comment:
I believe the Australian economy remains extremely well placed to benefit from ongoing commodity demand, especially with China still growing strongly. I expect ongoing interest rate increases from Australia. I still believe that the AUD/USD has a long way higher to go yet.

My target remains1.0000.

Happy with the current exposure.

NZD/USD
Long NZD 2m short USD at .7160.

Current rate: 0.7000
Current : Loss 160 points.

Comment:
The NZD/USD has lost its way somewhat, with the RBNZ tardy in raising interest rates. They will eventually regret this.

The NZD/USD is still following the AUD/USD, which is now driven by Asian developments. The NZD/USD has not had the benefit of rising interest rates, but this cannot be too far away now. When the RBNZ begins to raise interest rates in June, the NZD/USD will begin to see higher levels again. The NZD/USD still has a long way higher to go yet. Target remains the highs of 0.8216.

Unrealised gains NZD710k (AUD/JPY +227, NZD/JPY +387k, GBP/USD -23k, AUD/USD +165k, NZD/USD –46k).

Total gains banked since August 2007:
NZD2,344,360.38

The proposed EU Greek bail-out cannot simply bypass German law

This is an excellent article and lays out very well why Germany will not act in favour of Greece or anyone else!


The proposed EU Greek bail-out cannot simply bypass German law

Position changes

Got cold feet on my long EUR short USD trade and closed it out today at 1.3590 for a small gain.
But decided I hate the pound, and so sold GBP1m and bought USD at 1.4990.

Will update more tomorrow.