With much of this year’s investor sentiment being dictated by crises such as a potential eurozone breakup and a hard landing in China, conditions now seem to be improving and more emphasis is being put on fundamentals.
But the best companies might not be found in traditional hunting grounds such as the UK, the US and core European economies like Germany. Recent research suggests Norway, Indonesia and Turkey might have more attractive stock markets.
Investors shift towards stocks
Last month, Bank of America Merrill Lynch’s Fund Manager Survey claimed that the ‘great rotation’ out of bonds and into equities is underway. The research showed asset allocators have increased their positions in stocks while lowering their exposure to bonds for five months running.
And figures published yesterday by the IMA revealed that retail investors are choosing equity funds over fixed-income portfolios. Equity funds took £550m in net retail sales during October, surpassing the £336m recorded by bond funds and the second consecutive month it has been the best-selling asset class.
This move was accompanied by some evidence that investment is starting to be governed by fundamentals again, rather than the news flow that has driven decisions for most of the year. Issues such as the eurozone debt crisis, slowing Chinese growth and the US fiscal are looking increasingly priced into the equity valuations.
The IMA statistics showed investors still have a global appetite when buying equity funds, with products targeting the global space being the most popular on a geographic basis. Which raises the question, where can the best equity opportunities be found?
Looking further afield for equities
A new study by Swedish banking group SEB argued that Norway, Indonesia and Turkey are currently the three most attractive equity markets from a country perspective, ranking them above more obvious choices.
Hans Peterson, chief investment officer at SEB Private Banking, said: "Putting money into stock markets will make more and more sense if there is a greater focus on the recovery. The road to recovery will still be lined by financial risks. Yet opportunities exist, and returns will be generated in places other than traditional industrialised countries.”
SEB’s ranking, which is based on its Country Model quantitative screening tool, singled out Norway as the most attractive equity market because of its high score for valuation and dividends.
Indonesia, the second most attractive, is highlighted owing to its good return on equity while Turkey is highly rated for its earnings revisions and market valuation.
But the US languishes in 14th place, followed by the UK in 15th. Both were beaten by popular emerging markets, with Russia sitting in sixth place, China in seventh and India in 11th.
During October, Global Emerging Markets was the most popular IMA sector, racking up net retail sales of £228m last month. SEB agrees in the equity opportunities in the space, saying these markets have the “greatest potential” over the long run and highlighting their decoupling from troubled areas.
Taking part in the great rotation
The evidence that investors are ready to leave the relative safety of fixed income in search of equities’ higher returns seems to be growing. Although growth is expected to remain sluggish, the outlook for concerns such as political risk appears to be improving, adding support to such a move.
“Long-term forecasts and macro indicators are showing growth and because stock markets are comparatively undervalued, this creates room for higher share prices,” SEB’s research said.
“While there is some hesitation in world stock markets right now, we are choosing to be cautiously optimistic. We foresee good opportunities for a positive trend once all the pieces fall into place.”
For investors ready to embrace the great rotation and start aggressively increasing their exposure to stock markets, it may be worth looking past the choices that closer to home and hunting the returns of markets further afield.
