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What a difference a quarter makes. DFMs may not have chopped and changed too much over the summer, but fund managers’ latest asset class outlooks suggest many of this group have had a rethink in recent months.
The chart below compiles the Q4 views of a series of asset managers. Compare it to when we gauged the opinions of this same cohort, three months ago, and sentiment looks very different.
For the majority of asset classes, this shift means more positivity. But there is one very obvious outlier. None of the firms in our sample are now positive on UK equities going into the final quarter. That in itself could get some contrarian alarm bells ringing – but it may also indicate the sheer scope of the challenges ahead.
The other big loser over recent months has been Japan, whose stock market is almost as out of favour as domestic equities. That stands in contrast to Europe in particular, on which several firms have turned positive or at least neutral.
EM has also seen a slight uptick in positivity, insofar as most now sit on their hands in a neutral position rather than being outright negative.
In bonds, the credit rally has encouraged more to get involved. Both investment grade and high yield debt now enjoy more backers than they did at the start of the third quarter.
There’s still room for conflicting views, of course: one asset manager has gone markedly against the grain by turning outright negative on investment grade debt. Yet that only serves to emphasise the underlying trend: fund firms’ house views have undergone a summer overhaul.
A little more on some of those crowded trades we discussed yesterday. As well as picking out the biggest underweights and overweights globally, UBS analysts also looked at regional preferences.
While the largest active positions in the US are much the same as they are globally – a sign of how the country now dominates global indices – there’s more of interest closer to home. We know from the chart above that managers are turning positive on Europe at the same time as they’re underweighting the UK. That doesn’t play out on a stock-specific level. The analysts’ ten most overweighted shares in developed Europe are all from the UK, whereas the underweights are all from the wider continent.
Again, this is partly to do with benchmark weights. In absolute terms, the average European manager still has more in big underweights like Nestle (2.8 per cent) and Roche (2.4 per cent) than they do in any of the UK positions. Still, it’s a useful reminder that the likes of Reckitt Benckiser, Diageo and Unilever are still very much crowded trades even at a time when the UK is falling from favour.
That said, other shares in the overweights list are more notable. Anglo American takes third place, and Barclays also features highly. Resources and banks aren’t at the top of many agendas right now, but stock selections are still reflecting a slightly different reality.
The conclusion from this morning’s quarterly Link Dividend Monitor is that while equity income investors aren’t quite out of the woods, things are starting to improve. The firm says its worst-case scenario, in a surprising development by 2020’s standards, “has steadily improved all year”. As wealth managers will already appreciate, the message is that the worst is now behind investors.
What’s arguably even more important is that Link says it now has “excellent visibility” on the prospects for the rest of 2020. That means the gap between its best and worst-case 12-month forecasts are now pretty small. If all goes well, UK shares will yield 3.6 per cent over the next year. If everything goes wrong (again), it predicts they’ll still yield 3.3 per cent. Hostage to fortune that may be, but it might provide some solace for those who are looking again at UK income options.