November 26, 2012 / 9:12 PM / 5 years ago

Funds dismiss "death of equity"

LONDON (Reuters) - Senior European fund managers on Monday dismissed claims that equity investing was a thing of the past, with two top investors heralding double-digit gains in European stocks next year and beyond.

Speaking in London on the first day of Reuters Global Investment Outlook Summit for 2013, the managers reckoned there was sufficient stabilization of the financial and economic world after five year of crisis to bring relative valuations back into play and history showed the darkest hour is often before dawn.

Much unloved and historically under-owned euro zone stocks in particular may well be the investment pick of next year even in the face of the bloc’s prevailing recession, austerity push and still considerable political risks, they said.

A claim this year by Bill Gross at U.S. bond fund Pimco that “the cult of equity is dying” may have captured disillusionment with assumptions of never-ending equity gains, but the investors reckoned it will also likely coincide with a significant bounceback in 2013 at the expense of pricey bonds and re-appraisal of equity’s value in portfolios.

“Now is the moment to take strategic positions,” Pioneer Investments’ Group Chief Investment Officer Giordano Lombardo told the summit, adding the seeds were there for double-digit gains for several years ahead.

“We will take all the market opportunities to add to our euro zone equity position,” said Lombardo at Milan-based Pioneer, which has $200 billion of assets under management.

He said euro zone equities were undervalued, under-owned and would benefit from a stabilization of the euro economy into the second half of next year as ‘fiscal drags’ ease and amid a reduction of competitiveness imbalances within the bloc.

There was little value left in core government bonds such as U.S. Treasuries, British gilts or German bunds, he said.

“There is no value in the safe havens.”

Saker Nusseibeh, head of Hermes Fund Managers, which is owned by Britain’s largest pension pot, the former British Telecom Pension Scheme, was more emphatic.

“We’re done with the bond markets,” he said. “It could go a little bit more, but call the top of the bubble, who knows?”


Giordano Lombardo, the Group CIO of Pioneer Investments, attends the Reuters Global Investment Outlook 2013 Summit in London November 26, 2012. REUTERS/Benjamin Beavan

Despite a host of dire warnings about global depression, government defaults, euro collapse and earnings implosions, developed stock markets returned more than 10 percent in 2012 even as equity holdings stayed at historic lows - thanks largely to aggressive monetary easing from the world’s top central banks.

But Nusseibeh said equity investing would see a renaissance of sorts after years in which big institutional investors pulled back for a range of reasons from high volatility, regulatory pressures, better liability matching and demographic pressures.

But he stressed he was not expecting the return of the bull markets of the pre-crisis era so much as a reassessment of the role of equities.

“The reason people first bought equities more than 100 years ago was not because the price of the stock appreciated, they bought it because it paid a dividend,” the Hermes Chief Executive Officer said. “The big turn in equities ... will happen when people start thinking about equities slightly differently and they are beginning to.”

Saker Nusseibeh, CEO of Hermes Fund Managers, speaks during the Reuters Global Investment Outlook 2013 Summit in London November 26, 2012. REUTERS/Benjamin Beavan

Nusseibeh, who also said the best quality U.S. and European equity names could generate double-digit gains next year, expects equity buyers to divide into two camps: a mainstream looking to dividend-paying stocks as a source of income and a second more speculative faction seeking a jump in value.

Still, the skepticism with which top funds continue to view equities was illustrated by Brussels-based William de Vijlder, CIO at BNP Paribas Investment Partners.

De Vijlder told the summit he remained neutral on equities for the year ahead and that equities would remain a “final frontier” in the post-crisis normalization of economies and markets.

Characterizing equities for many investors as bitter- tasting oranges, he said they would only be eaten once all the juice had been drained from the sweeter fruit - such as corporate debt and emerging market bonds.

“Can you see 15 percent on equities? Yes, but it’s a conditional forecast,” de Vijlder said.

There would continue to be caution about policy mistakes in such an extraordinary economic and policy climate worldwide, fear of mispricing in many markets and a need to see all the efforts to kickstart economies gain real traction.

“For many investors the cult of equity is to a large extent dead - many pension and insurer funds within particular short-term regulatory frameworks for example,” he said.

But “there will come a point for very long-horizon investors and you will see equity culture returning for them.”

Follow Reuters Summits on Twitter @Reuters_Summits

Additional reporting by Sujata Rao; Graphics by Vincent Flasseur; Editing by Susan Fenton

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