Press releases

13 December 2011

Fund managers expect a bumpy ride for 2012, with Eurozone crisis expected to dominate

The AIC's 9^th annual fund manager poll, published today, suggests that investors should brace themselves for another bumpy ride next year

An overwhelming 96% of managers expect 2012 to be another volatile year, although of these, 41% expect markets to come good by the year end.  Overall, 71% of managers think that markets will ultimately go up next year.  And with slightly better US growth figures in the third quarter, it’s interesting to see that 19% of managers expect the US to be one of the top performing regions next year, second only to the Emerging Markets sector (27%).  The AIC received responses from fund managers representing £18 billion of assets – a fifth of the industry.

Emerging Markets	Europe	Asia Pacific ex Japan	Asia Pacific inc Japan	Frontier markets	Japan	Latin America	UK	US	Don't know
27%	11%	11%	4%	8%	4%	8%	4%	19%	4%

Eurozone to preoccupy markets?

Some 86% of managers expect the state of the Eurozone to preoccupy financial markets once again next year.  In fact, nearly two thirds, 62% of managers think that the Eurozone debt crisis represents the single biggest threat to equities over the next 12 months (the other third, 33% believe that a global recession is the greatest threat).  

With this in mind, it’s perhaps not surprising that only 50% of managers expect equities to outperform other asset classes next year.  For 13% of managers, cash is king, whilst 8% expect gold to outperform other asset classes next year.  A further 8% expect commodities and natural resources to outperform next year.

Equities	Bonds	Cash	Gold	Commodities & Natural Resources	Commercial Property	Don’t know	None will do well
50%	4%	13%	8%	8%	4%	9%	4%

Glimmers of hope

However, it’s not all doom and gloom.  Whilst volatility is expected to be the order of the day, 71% of managers ultimately think that markets will go up next year.  When asked what gave them the greatest cause for optimism, some 26% of managers are encouraged by strong company balance sheets, whilst a further 26% believe that equities still represent good value.  A further 13% are optimistic that global growth is better than expected, and 9% are heartened by Governments’ intervention in the macro economy.

Strong balance sheets	Chinese economy stronger than expected	Equities are still good value	Governments intervention in macro economy	Further regulation from Europe	Better global growth than expected	Eurozone resolving its issues	Increasing prospects in developing countries	Interest rates remaining low
26%	9%	26%	9%	4%	13%	4%	4%	4%

Where is the FTSE 100 likely to end up next year?

Managers gave a tentative view of the short-term direction of markets.  An optimistic 20% of managers expect the FTSE 100 to close 2012 between 6000-6500, whilst 30% expect it to close between 5500-6000.  A further 30% of managers expect markets to continue to trade between 5000-5500, as they have for much of this year.  But a more cautious 10% of managers expect markets to close next year between 4500-5000, whilst 10% expect markets to close 2012 under 4,500.

Under 4000	4000-4500	4500-5000	5000-5500	5500-6000	Between 6000-6500
5%	5%	10%	30%	30%	20%

Which sectors will outperform next year?

Blue chips are the most widely tipped sector to outperform next year (20%), followed by financials (16%) and hedge funds (12%).

Financials	Private Equity	Smaller Companies	Biotech	Technology	Blue Chips
16%	4%	4%	8%	8%	20%

 

Hedge Funds	Utilities	Resources	Manufacturing	Other (high yielding stocks)	Don’t know
12%	8%	4%	4%	4%	8%

To gear or not to gear?

Considering the precarious state of the global economy, it’s perhaps not surprising that 41% of managers are taking a ‘wait and see’ approach to gearing, whilst 36% expect to make no changes.  However, 14% plan to increase gearing and 9% plan to decrease their gearing.

Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC) said: “It’s been a tough year for markets with Eurozone debt dominating the year. Fund managers are not surprisingly cautious about next year’s prospects, predicting that Eurozone worries will once again preoccupy markets.  Managers have tipped Emerging Markets as the best performing region for the third year in a row but in line with a cautious outlook expect blue chips to be next year’s top sector.

 “Whilst it’s interesting to gauge the views of investment professionals, markets are impossible to predict and one year’s best performing region can sometimes become the following year’s worst performer.  So it’s important to take a long-term view, ensure you have a balanced portfolio and not to get carried away by the latest ‘hot’ investment sector.”

Fund manager comments

Dr. Slim Feriani, Manager, Advance Developing Markets and Advance Frontier Markets said: “If Germany and/or the ECB don’t draw a line in the sand regarding the European debt crisis sooner rather than later, then a plunge in the Eurozone will lead the whole EU into a recession; the hit on confidence can easily drive a struggling US into a double-dip; and the slowdown in China will accelerate as recession in the external sector will hit small and medium enterprises particularly hard and the loss of confidence will drive housing prices to fall more than otherwise. Under this scenario all bets are off!  However, if Germany and/or the ECB draw a line in the sand as soon as possible, then markets will be off to the races. Under both scenarios, emerging markets are likely to continue to overtake the developed world in terms of their rapidly growing slice of the global wealth pie.

“Emerging markets fundamentals have never been this strong, even more so when compared to their developed peers. Emerging market equity valuations are at the bottom of their 20 year historical range. Yet, emerging market equities have significantly underperformed developed markets this year. Emerging markets haven’t underperformed their developed peers for two years in a row since the 1997/98 Asian and Russian crises. But, as long as the European saga continues and the outlook for the US economy and politics doesn’t improve, fundamentals are likely to remain in the back seat and technicals, momentum and sentiment will continue to drive global markets.”

Katherine Garrett-Cox, Chief Executive, Alliance Trust said: “We expect the prevailing issues from the latter part of 2011 to roll forward inexorably into 2012; the threat of a global recession, the weakness of the Western consumer and particularly the failure of the political leaders of the Eurozone to move swiftly to address the full magnitude of the problem that faces us all. Looking forward, we do believe that the Eurozone leaders will eventually produce a solution that will adequately calm investors’ anxieties about the future of the Euro project. However, we do not expect that this will happen without the markets having been further tested, and this will be demonstrated through continued volatility of equity prices. Despite this, we believe that the ongoing uncertainty presents a real opportunity for investment trusts and other long-term investors to gain exposure to quality companies, in the Eurozone and elsewhere, at attractive valuations.”

Alan Porter, Manager, Securities Trust of Scotland said: “While the macroeconomic backdrop remains largely negative, there are some positive factors at play in the outlook for global growth – and especially in the outlook for income funds. Company balance sheets are strong, and firms are taking a more positive attitude to returning cash to shareholders in the form of increased dividends and share buybacks. Valuations, particularly among larger companies, are also beginning to look attractive. With many investors still risk-averse and cash levels still high, we believe that there are increasing grounds for optimism. Our investment focus remains on companies with quality franchises, good growth prospects and attractive valuations.”

Andrew Bell, Chief Executive, Witan Investment Trust said: “Equity volatility is less of a problem for seasoned investors (who are accustomed to share prices being more variable than companies’ fundamental performance) than its indirect effect on new investors. This is because changing rules on pensions and higher education funding place more of the burden onto individuals and their families, at a time when the yields on cash and government bonds (traditionally viewed as conservative safe havens) are at record lows, even before the impact of inflation.

“Investing in ‘real’ assets such as commercial property and company shares will need to play a part in generating adequate returns for investors. If volatility does not moderate, investors will face an uncomfortable choice – either accept apparently inadequate returns from ‘safe havens’ or find ways of coping with the valuation risks entailed in seeking higher returns from equities and property (by, for example, phasing investment in instalments or steeling oneself to take a long-term view).  There is a big task here, both for investor education and for the financial sector in regaining the trust of investors.”

Sam Cosh, Manager, European Assets Trust said: “All the issues highlighted above are well known to investors and that is why valuations and allocations towards equities are low. Buffet has said, ‘be greedy when others are fearful and be fearful when others are greedy’. We may not yet be at the point where we should be greedy, but we have increased our gearing through the summer to 10% because we see good value in our portfolio. Clearly a collapse of the Euro would create further volatility, however any incremental good news should be taken very positively given the negative sentiment in the market.”

Richard Titherington, Manager, JPMorgan Emerging Markets Investment Trust and JPMorgan Global Emerging Markets Income said: “Although markets remain news driven, aggressive easing by central banks across emerging markets would make us progressively more optimistic.  Valuations are cheap, consistent fund outflows have begun to moderate and softer commodity prices will alleviate inflationary pressures, justifying monetary easing.

“Our long-term assessment of corporate profitability is positive.  Using leverage as a prop to offset lower margins or falling productivity from poor investment decisions is neither needed, nor widespread.  However, we do expect earnings expectations to fall further as revenue growth is marked down due to cyclical factors.  This may act as a short-term headwind to equity market performance.”

James Henderson, Portfolio Manager, Lowland Investment Company, Law Debenture Corporation and Henderson Opportunities Trust said: “Investors could be surprised by the level of dividend growth next year – this is fuelled by strong cash generation and balance sheets that are much improved since 2008. Dividend growth for 2012 could be as much as 10%.”

David Pinniger, Manager, International Biotechnology Trust, said: “In a challenging economic and market environment, the risk-reward profile of backing innovation improves dramatically. Investors should be looking to invest in highly innovative sectors when the end markets are fundamentally insulated from the economy. Biotechnology is one such area – a global growth industry that is delivering an incredible new product cycle.”

-Ends-

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Notes to Editors:

1. The research was conducted by AIC between 15 November 2011 – 5 December 2011.  Investment company fund managers representing £18bn of assets responded – a fifth of the industry.
2. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment.  Today, the AIC represents a broad range of closed ended investment companies, incorporating investment trusts and other closed ended investment companies and VCTs.  The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help Members add value for shareholders over the longer term. The AIC has 343 members and the industry has total assets of approximately £90.7 billion.

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