December 2011

CAPTAL MARKETS: On the verge of change

LombardoPioneer Investments argued the case for a ‘renaissance of risk’ at its annual client investment conference, where Funds Europe was the media partnerMany fund selectors believe investors are on the verge of allocating a greater amount of money to equity investments and away from bonds. Forty-four per cent of fund buyers, who were at an investment conference hosted by Pioneer Investments in Dublin, Ireland, in June, said they believed the “Great Rotation” out of bonds and into equities was about to happen. Giordano Lombardo, group chief investment officer at Pioneer, said investors should allocate a greater amount of portfolios to equities. And Diego Franzin, Pioneer’s head of equity – Europe, added that valuations of equities compared with bonds had not been as cheap since the 1950s when the “Cult of Equity” was born Lombardo said: “It’s absolutely right to consider risky assets, particularly equities. They offer better value than any other alternatives, especially bonds, and they have a better risk-reward profile in the longer run.” Pioneer Investments, owned by Italy’s UniCredit banking group, has €165 billion ($211 billion) of assets under management, as at March 31, and is present in Argentina, Colombia, Chile, Mexico and Peru. The conference was entitled “The Renaissance of Risk”. Lombardo explained that Pioneer increased its allocation to European equities in June 2012. European equities have been hit severely in recent years by the crisis in the eurozone. Asked for their favourite asset class over the next three to five years, 31% of Pioneer’s audience said European equities. US equities were favoured by 27% of the audience, who were drawn from an international base including Latin America, and 24% said emerging markets. Much lower in fourth position, the next highest preference was for emerging market bonds, favoured by 7.1%. A major theme in capital markets, the tapering of quantitative easing by the US Federal Reserve, was also considered at the conference. Tanguey Le Saout, head of European fixed income at Pioneer, said a reduction in this form of economic support by central banks would reveal to what extent investors felt markets had genuinely begun to recover. “The partial withdrawal of quantitative easing is good for markets in that it will show how good the fundamentals are.” Quantitative easing has lowered interest rates on many quality sovereign bonds in recent years, and with equities deemed as too risky, high yield bonds have been a highly sought asset class by investors hunting for yield. Matteo Germano, Pioneer’s global head of multi-asset investments, says his team is monitoring the asset class and has a small, selective exposure. He expects a deterioration in high yield bonds, particularly emerging market corporates, which he believes will be hit by slower growth in Europe. Exposure to emerging market bonds has reduced and Germano is looking to buy more equities. A reduction in quantitative easing in the US is made more likely if the economy shows signs of growth. To this end, Le Saout is watching payroll data. He believes that if non-farm payroll comes through strongly the Federal Reserve could start tapering by September. Lombardo says the US is ahead in the recovery cycle and that Europe still faces difficult challenges. However, he says there is support for Europe’s macroeconomic case. “A lot of ground has been covered in terms of austerity. The additional level of austerity will be much less if not close to zero.” Lombardo added that 75% of fiscal reform in the eurozone has happened already, while most eurozone countries are close to balancing their current accounts. The eurozone as a whole is running a trade surplus. The audience’s preference for European equities appears to be borne out by institutional investors in Europe and Asia. Lombardo said they had told him they also wished to make more purchases of the asset class. ©2013 funds global latam

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