Ninety per cent of investors anticipate positive returns from global equities over the next three years, with annual return expectations for the asset class averaging 6%, according to Allianz Global Investors’ first global survey of investor attitudes to risk.
The firm recently polled 390 institutions in 41 countries, which also concluded that the increased regulation since 2007 hits them to the tune of 2.3% of annual returns, primarily as an opportunity cost of risk foregone rather than a physical cost.
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| Elizabeth Corley, CEO of AllianzGI |
So here comes the great rotation? “It is not a great rotation, it is a great rebalancing,” says Elizabeth Corley, CEO of AllianzGI. “Institutional investors are rotating out of sovereigns and duration but they are very constrained in the extent that they can allocate to equity. “They won’t rush into new asset allocations – there are many regulatory constraints to rotating out of FI into equities, including IFRS accounting, sponsor constraints, behavioural constraints and information flow.”
Many pension funds and insurance companies have spent the past five years allocating away from equities as they tried to diversify risk after the financial crisis, so this will not be a speedy reversal. These investors cannot simply cut duration – they have long-term liabilities, which don’t go away.
“Clients need a synthetic risk return which they can achieve by investing in multi-asset strategies involving bond substitutes such as infrastructure,” says Corley. “But the regulators are lagging this need for diversification – they are still encouraging investment in sovereign debt.
“Investors have been fortunate that inflation has so far remained muted but for many investors they are having to go along the risk curve and take intelligent risk.”
They are doing so while also beginning to position their portfolios for the end of ultra-loose monetary policy in developed markets. Tail risk and rising interest rates are their primary concerns.
“We see our clients needing to take smart risk but worried about taking any risk,” observes Corley. “Five years on from Lehman, the scars still run very deep. The supply of information is not weak but the supply of insight and understanding is.
“Quantitative easing (QE) has become a necessary condition for markets to function. It is a safety blanket that needs to be taken away. Central banks have traded short-term stability for long-term, maybe magnified, risk. As an investor you need to get out of the trap before it shuts on you.”
Sixty eight per cent of investors that AllianzGI spoke to for the survey believed that the monetary policies of developed nations in the past five years have increased the risk of abnormal price distortions in fixed income versus 45% feeling the same for equity markets. The top-two distorted markets are – unsurprisingly – high yield corporate debt and developed market sovereign debt.
“It is not getting any easier despite the broader economic situation improving,” admits Corley. “We are still at a very fragile level. There is herding behaviour around certain assets.”
She points to the London real estate market as an example of this but believes, however, that these are not true asset bubbles.
“The conditions for real asset bubbles are absent because there is no leverage,” she claims. “That is necessary and is absent. Most bubbles are traditionally accompanied by the euphoria of a new paradigm – such as we saw with the dotcom boom – and we don’t have that either. These are mini bubbles that are contained and not systemic.”
Hypersensitivity to news flow has led to risk-on, risk-off behaviour, no more so than recent market volatility triggered by Fed chairman Ben Bernanke’s comments as to when QE might come to an end.
“The assumption is that at some point QE has to stop,” says Corley. “We see market overreactions to news flow, and central banks are now using words as the tool for policymaking. We are on a tightrope from QE to no QE, but we need to turn that tightrope into a plank.”
