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There are plenty of reasons to keep investors nervous in the
coming week. Eurozone finance ministers meet in Luxembourg on Monday but they
are unlikely to decide on the next Greek aid tranche or plans to bolster the
bloc's rescue fund. The closely-watched US non-farm employment report on
October 7 could reinforce expectations that the economy is slowing down.
However, with gloom so widespread, it does not take a lot to
turn the mood around. At its policy meeting on Thursday, the European Central
Bank may start preparing the ground for an interest rate cut - speculation
about which triggered a mini-rally in risky assets earlier this month.
World stocks, measured by MSCI, which were down 17% in the
third quarter, look like posting their poorest performance since Q4 in 2008,
after Lehman Brothers went bankrupt. The benchmark index has fallen 21% since
hitting a three-year high in May.
Investors have been certainly sitting on the sidelines. Surveys of 59 leading investment houses in the United States, Europe and Japan showed they held 6.3% of their portfolio in cash, the highest since at least 2009.
Lipper data shows US money market funds attracted $6.2bn in
the week ending September 28, while equity funds suffered outflows of $5.9bn.
"While equity markets will stay volatile in the short term
capped by problems within Europe and concerns about global growth, our view is
that as we progress through these we do eventually get some kind of resolution
in Europe," said Alec Letchfield, chief investment officer at HSBC Asset
Management.
"Equities ought to focus on good valuations. Also the high cash levels - we would see it as opportunity of money going into markets and typically that’s a good sign for equities rallying in due course."
Reuters data shows world stocks have on average risen 3.7%
in the fourth quarter, making it the best period for equities since 1971.
Income focus
Rather than sitting on the sidelines, asset managers must
find investment opportunities if they are to deliver inflation-beating returns.
Patrick Armstrong, fund manager at Distinction Asset
Management, likes high-yielding stocks as the global economy will be mired in a
combination of slow growth and inflation.
"Disinflationary forces from emerging markets will become inflationary forces in the developed market," he said.
"We are in a stagflationary environment, that's the most
toxic environment for investors. For equities we are in sectors that have
stable cash flows that pay dividend above inflation. Dividend is a pure play to
hedge against inflatiandon."
Distinction Asset Management likes pharmaceuticals, where dividend yield stands at 5% - 6%, and utilities, while it shorts small cap US stocks.
The fund also bought short-duration Greek bonds maturing in
March next year, which were hedged until July by short positions on European
banks.
"There's a small chance that we can get 100% back while the
bureaucratic machine moves slowly," Armstrong said.
JP Morgan's asset allocation team recommends buying
high-dividend yield US equities against 10-year US Treasuries, reflecting
increasing focus on income by real money investors such as pension funds and
insurance companies.
