Only about 25% of of Europe's fund buyers have a positive macroeconomic outlook. This means the number of optimists is now at its lowest in at least three years, when we started measuring macroeconomic sentiment on a consistent basis. And it is a far cry from summer 2015, when more than two-thirds of fund selectors had a positive view on the strength of the world economy, while pessimists were nowhere to be seen. They are still a minority, but there are more of them now.
This growing macroeconomic pessimism has translated in a significant amount of fund selectors expecting another market correction this year. Eight in 10 delegates at Expert Investor's Pan-European Congress in March think this will happen happen.
Interestingly, however, the asset classes that have seen the biggest surge in popularity among fund buyers this year are the ones most exposed to the risk of recession: commodities, emerging market equities and high-yield bonds. However, these assets are cheap precisely because much of this risk is supposedly already priced in, which still makes these asset classes an attractive buy to many investors. After all, many of them are desperate for reasonable valuations and yield, things that have become increasingly scarce in developed equity and investment-grade bond markets.
The commodity question
Those who talk of commodities also talk emerging markets. Emerging market equities have correlated strongly with commodities over the past year or more, so it is no surprise that since December they have been back on investor radars again, with enthusiasm surviving the market correction at the beginning of the year. Anyway, thanks to a strong recovery in March, asset prices have come back up to December levels, so the starting point is about the same.
Though investors responded negatively to Saudi Arabia's refusal to agree to a crude output reduction this week, commodities are among the asset classes that have risen fastest in popularity: at the end of 2015, more than half of Europe’s fund buyers had no exposure to commodity funds and only one in 10 planned to increase their exposure. Enthusiasm for commodities has increased markedly since, though that does not mean the fund category is now universally loved. In fact, there is no asset class that splits minds as much as commodities. In Germany, Belgium, France and Luxembourg, at least four in 10 investors plan to increase their exposure to commodities. The attitude of Nordic investors is different: the majority of Swedes, Danes, Norwegians and Finns prefer to stay clear of commodity funds.
More than a third of European fund investors plan to increase their allocation to emerging market equities in the next 12 months, mostly from an underweight position. Appetite for the asset class is much more evenly spread across Europe than is the case for commodities.
While Luxembourg-based fund buyers have the biggest appetite, just as is the case for commodities, every single country we survey has more than 20% buyers. Those planning to increase allocation outnumber those planning a decrease in every country bar Spain.
However, if recent gloomy IMF forecasts about a global economic slowdown become reality, and if the Saudi U-turn on oil output curbs means the nascent recovery of the oil price will reverse, these two asset classes will be in for another rough ride. And the same goes for US high yield bonds, which are highly exposed to commodity firms.