Stocktake: Fund managers sour on Europe and turn to US

Global fund managers are flocking to American stocks but are finally souring on Europe, according to Merrill Lynch’s latest fund manager survey.

Fund managers are overweight US equities for the first time in 15 months, while the number saying the United States has the most favourable profits outlook has hit 17-year highs. In contrast, European allocations have hit 18-month lows while investors’ intention to own European stocks has fallen to levels unseen since Brexit.

Merrill's survey is best viewed in a contrarian light. Excessively bullish sentiment is a headwind, excessively bearish sentiment a tailwind. For some time now, managers have strongly preferred Europe over the US, during which time the latter has comfortably outperformed. Sentiment is now changing, with investors getting worn down by disappointing European economic and earnings data as well as political turmoil in Italy.

Still, it’s too early to take a ‘sell US/buy Europe’ stance. US allocations are not excessive, while investors remain overweight Europe, where positioning is “not yet fully defensive”, says Merrill.

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Fed sticks to its rate-hiking plans

For years, US stock prices have been supported by the assumption that markets had the Federal Reserve in their corner. However, last week's Fed statement is the latest indicator new Fed chief Jerome Powell will not be derailed from his rate-hiking plans.

The Fed now expects four rather than three rate hikes this year. Powell is a pragmatist, not a hawk, but it’s notable that he downplayed the risk posed by taking rates beyond neutral levels, of an inverted yield curve, and the effects of trade tensions.

Unsurprisingly, treasury yields flattened to their lowest levels since 2007, indicating a growing assumption the Fed is prepared to initiate “restrictive monetary policy sooner rather than later”, as Vanguard put it.

Tightening policy has the potential to dampen risk sentiment. The Fed, it seems, is not for turning.

Index changes impact Unilever and Twitter

Consumer giant Unilever last week announced that changes to its legal structure – it has long been based in London and Rotterdam but the latter is about to become its sole headquarters – meant it was likely to be removed from the FTSE 100 index. Shares promptly sank 4.5 per cent as investors worried that Unilever would be hit now it would no longer be exposed to the billions of pounds benchmarked in UK index funds. Unilever shareholder Columbia Threadneedle Investments expressed its disappointment, saying the company had displayed a “lack of engagement with shareholders”.

The previous week, Twitter shares bounced nicely, rising 5.9 per cent over a two-day period after S&P Dow Jones Indices said it would be added to the S&P 500.

However, there’s nothing inherently bearish or bullish about index removals and additions. In fact, research suggests stocks removed from an index tend to outperform their replacements over the coming year. Index deletions and additions don’t affect a company’s fundamentals. The initial price moves are artificial and wear off over time.

The moral: don’t cry if your stock is removed from an index and don’t jump for joy if it’s added to one.

Erdogan takes on Moody’s

Turkish president Recep Tayyip Erdogan is a bit of a tough guy prone to conspiracy theories, so last week's threat to "conduct an operation" against ratings agency Moody's wasn't altogether surprising.

A self-proclaimed “enemy” of interest rates who once promised to “throttle” and “choke” critical “speculators”, Erdogan isn’t keen on ratings agencies such as Moody’s, which rates Turkey’s debt as junk and recently downgraded 17 Turkish banks. “You take steps saying ‘How do I stain Turkey? How do I put them in a tough position?’”, he said last week. “They will not succeed.”

Well, they will "succeed" if Erdogan follows through on his threat. Currently, Turkey solicits ratings from Moody's and Fitch. Many international funds need two ratings to invest in a country's debt, so it would be a "total disaster" if Turkey dropped Moody's, tweeted BlueBay Asset Management strategist and Turkey expert Timothy Ash.

“Ignoring orthodox and rational economists and rating agencies are what got Turkey into the current problems,” added Ash. Erdogan mightn’t like ratings agencies telling him what to do, but the International Monetary Fund is unlikely to be kinder company.

Hedge funds like to pump and dump

A new study confirms a point often made by Stocktake – take hedge-fund stock recommendations with a grain of salt.

The study Talking Your Book: Evidence from Stock Pitches at Investment Conferences analysed 341 stock pitches from 29 hedge funds over a five-year period. Typically, stocks outperformed nicely prior to being pitched by managers, and enjoyed another bounce in the aftermath of the conferences. Managers then "take advantage of the publicity", booking profits by selling off their holdings.

Venture capitalist Paul Kedrosky was unsurprised, tweeting: “tl;dr: At conferences hedge funds only pitch ideas that they’re already in. Also: The sun rises in the east and sets in the west. And it gets wet outside when it rains.”