Signs abound of growing investor confidence

By Jeremy Gaunt, European Investment Correspondent - Analysis Reuters - Wednesday, May 7 12:46 pm

LONDON (Reuters) - Gains on world stock markets and among riskier assets such as credit are being underpinned by a growing optimism that has investors looking beyond the market turmoil triggered by the subprime debt crisis.

A series of indicators ranging from polls to internal investment bank research and actual flows of money suggest that fears about the U.S. economy and a financial sector meltdown are being put on one side.

One clear example is the VIX market volatility index , the so-called fear gauge, derived from pricing in the options market, that in effect reflects expectations of future volatility of the S&P 500 U.S. stock index.

Trading a little above 18, the VIX is at its lowest level since December and more than 50 percent down from a January peak above 37.

"We have turned a corner," said Andrew Popper, chief investment officer of SG Hambros Bank. "That is not say there will be no more problems. But things are looking better."

This kind of tentative optimism is being reflected across the board.

Investment bank UBS, for example, notes that its internal equity risk appetite indicator has moved into positive territory for the first time since late October.

The indicator is based on measures such as the kind of stocks investors are buying, the cost of insuring stock positions, and credit and foreign exchange conditions.

Its fixed income indicator is also in low risk aversion territory and its foreign exchange indicator is near its lowest level of risk worry in 10 months.

State Street, in the meantime, says institutional investors are putting money into developed market equities at the highest rate since the credit crisis began last August, based on movements in the $14.9 trillion (7.6 trillion pounds) it keeps as custodian.

"Opportunistic risk seeking is the order of the day," it said in its latest report on investment flows.

Reuters asset allocation polls last week also underlined the trend. They showed global investors with the highest percentage of stocks in their portfolios since December.

SUNNY DAYS?

It is always a bit of a chicken-and-egg situation -- that is, which comes first, price rises causing optimism or optimism causing price rises -- but the sunnier mood is evident from market numbers.

World stocks as measured by MSCI are nearly 14 percent above their January 22 low and have eaten back well over half of their steepest losses since the correction began.

At the same time, government bond yields have risen and their gap with corporate credit and emerging market sovereign debt narrowed, traditional indications of rising risk appetite.

Spreads on emerging debt, for example, have narrowed around 75 basis points since mid-March.

The question for many investors is whether all this is the start of a new, more positive market environment to accompany a U.S. economic recovery and easing credit crisis or whether it is just a bear rally, an upward blip in downward times.

There are certainly those who adhere to the latter. David Shairp, global strategist at JPMorgan Asset Management, for example, reckons equities have risen mainly because they are the best of a bad lot.

He likens them to the femme fatale in the film "Fatal Attraction" who rises from under the bathwater in one final attempt to cheat death and attack the protagonist.

"What has been equally remarkable has been the death-defying nature of equities in the face of a full blown credit crunch, earnings downgrades and the (apparent) onset of a U.S. recession," he argued recently.

And there are suggestions of this in some of the newly optimistic indicators. The VIX, for example, is lower but remains well above the levels it has been at since mid-2003 when the post-Iraq war bull market began.

The Reuters polls also showed investors hanging on to above average reserves of cash, a sign of caution.

MOMENTUM

But the momentum is currently with the optimists and may end up feeding on itself.

SG Hambros' Popper notes that much of the volatility that hit markets at the end of last year was triggered by what he said were exaggerated writedowns of losses from banks.

The market pricing that was driving these writedowns is now being corrected, along with aggressive actions by the U.S. Federal Reserve to extend funding facilities and work with other major central banks.

There remain, of course, worries about the ailing U.S. economy and its potential spread elsewhere, into the euro zone, for example.

Investors, however, do seem to be stirring from their trepidation. They may even be loosening their grip on their cash security blanket.

Fund tracker EPFR Global reports that in the last week of April, investors pulled $32.4 billion out of money market funds.

(Editing by Ruth Pitchford)

• Email Story
• IM Story
• Printable View
• Blog This
• Post a Comment

Recommend this article

Sponsored Links

(What’s this?)