Underinvested in an improving economy?

Equity markets kept Monday’s positive mood after President Putin announced that he did not want to split the Ukraine, whether that means he still wants the whole thing for himself we shall see. Today’s US economic data once again either met or beat expectations. Core Consumer Price Inflation met expectations at 1.6% year on year, with a rise of 0.1% month on month, which continues to show that inflation is not picking up in a material way. US building permits and Manufacturing sales also came in above expectations. One slightly surprising piece of economic news came from Germany today; the ZEW economic sentiment survey came in considerably weaker than anticipated. The Eurozone survey showed economic sentiment fell to 61.5 in March from 68.5 in February. If the weaker than expected inflation data is starting to feed through into weaker economic sentiment, the day the ECB are forced to act is coming ever closer.

Merrill Lynch released their monthly global fund manager survey today. One noticeable point from the survey is that fund managers expressed a desire for CEOs to invest more on capital expenditure, and to focus less on cash returns and share buy-backs. There did appear to be some inconsistencies in the survey. Risk aversion is high, which was reflected in higher than normal cash levels, equity allocations at 15-month lows, as well as hedge fund exposure at 21-month lows. Geopolitics and China caused the greatest investor concerns along with a belief that stocks are the most “overvalued since 2000”. Despite the survey participant's cautious positioning, when questioned as to their views on the strength of the economy, the number of investors expecting a stronger economy actually rose in March. As to what point in the economic cycle they thought we are in, most believe currently mid-cycle.

The most over-owned equity market according to the survey is the UK, and the most over-owned sector is Discretionary. The most under-owned market is Emerging Markets and the most under-owned sector is Energy. There again appears a slight inconsistency as the UK market has a real EM bias due to its exposure to the resource sector.

In conclusion, investors think equities are expensive and remain underinvested but think the economy is improving. Should the economy continue to recover, companies earnings should improve and valuations will become more attractive. After a year when the stock market performance ran ahead of earnings, perhaps this will be a year of earnings catching up with the market a little. 

Posted on March 19, 2014 .