LONDON Nov 15 Global stocks may be running out
of room to rally further after a bumper year as the fragile
economic recovery and the prospect of a cut in the Federal
Reserve's bond buying discourage big investors.
Equities are the best performing asset so far in 2013, with
the benchmark MSCI world equity index rising 17
percent since January. Wall Street and some European
indexes have been hitting record highs on a
This year's rally is unique because it has been mainly
driven by mutual funds and retail investors. They have been able
to sustain inflows by reinvesting their income, as cash-rich
corporates not confident enough to expand their businesses
increase dividends and buy back shares to reward shareholders.
In contrast, institutional investors - who collectively
manage $56 trillion, or 70 percent of global investment assets
- have yet to fully embrace this year's "Great Rotation" move
into equities out of bonds.
Fund managers surveyed by Bank of America Merrill Lynch had
a relatively high 4.6 percent of their portfolios in cash this
month, while the number of investors saying equities are
expensive hit its highest level since January 2002.
Data from JP Morgan shows pension funds and insurers in the
United States, Japan, Europe and Britain have actually bought
$230 billion of bonds in the first half of this year and sold
$20 billion of equities.
"Right now we're sitting in our overweight equity positions.
We wouldn't buy more. In the short-term the market will be
sensitive to all the tapering questions concerning the Fed,"
said Benjamin Melman, head of asset allocation at Edmond de
Rothschild Asset Management in Paris.
"If you look at valuations, there's a far less room for
manoeuvre compared with what we had previously. We probably
won't see the same kind of performance on equities next year."
The ratio of equity prices to expected earnings over the
next 12 months for the S&P 500 index is currently 14.8 - the
highest since 2010 and above its long-term average of 13.9.
The same measure for STOXX Europe 600, at 13.3
percent, is at a four-year peak and notably above its average Of
So far this year, global equity funds have drawn $229
billion of inflows or 3.7 percent of total assets under
management (AUM), with Europe attracting inflows for 20
consecutive weeks, according to BofA data to November 13.
Bonds drew just $15 billion, or 0.5 percent of AUM, while
money market funds had $95 billion of outflows, equivalent to
2.9 percent of AUM.
Respondents to the BofA survey said G7 bank lending growth
and Chinese and Asian growth are the missing catalysts for
"Investors want to be involved in stocks but they are not
fully invested," BofA's European investment strategist Manish
Kabra said. "What will turn reluctant bulls into raging bulls?
We need to see more bank lending growth in the G7."
Bank lending in the United States and Japan is accelerating,
but European banks are still shrinking their balance sheets and
cutting back on loans.
There is also a long-term incentive for institutional
investors to avoid equities because of regulatory changes that
require funds to take on extra capital when they increase
holdings of risk assets.
"There's more regulatory burden to hold equities for
institutions," Rothschild's Melman said.
Renewed discussion about when the Fed will start to scale
back its monetary stimulus could prompt selling of equities as
it would lead to higher U.S. Treasury yields.
Comments this week by next Fed chief Janet Yellen making
plain she would keep the U.S. central bank's easy monetary
policy until a job-creating economic recovery was in place have
pushed stocks back towards five-year highs.
A string of U.S. data pointing to a stronger recovery had
recently prompted markets to revise their expectations of when
the Fed will begin to taper to early as December from March.
Societe Generale says U.S. stocks will come under pressure
if the equity risk premium - the excess return that investors
require to hold stocks over risk-free bonds - normalises to its
long-term average of 3.9 percent from the current 4.6 percent
and bond yields to rise to 3.9 percent by end-2014.
"Rising bond yields during period of economic recovery are
not necessarily bad for equities," SG said in a note to clients.
"However, at a time when earnings momentum remains weak and
the consensus earnings growth estimate is expected to moderate,
rising bond yields could be a catalyst for a U.S. equity market