International investors are the most bullish on stocks in at least 3 1/2 years, with close to two- thirds planning to raise their holdings of equities during the next six months, according to a Bloomberg survey.
As the global financial and business elite gather in Davos for their annual forum, 53 percent of respondents to the Bloomberg Global Poll also say equities will offer the highest return in the next year. That’s a 17 percentage point jump from the last poll in November and the most since the quarterly survey of investors, analysts and traders who subscribe to Bloomberg began in July 2009.
Behind the enthusiasm for shares: growing confidence in the U.S. economy and ebbing concerns about Europe. America is in its best shape in two years, according to the poll, with a majority of the 921 surveyed on Jan. 17 describing the economy as improving. In a sign the euro-area’s three-year debt crisis is easing, only 45 percent said the region’s economy is still deteriorating, down from seven in 10 two months ago.
“There does appear to be some cautious optimism that things are slowly being resolved,” Ben Kelly, an equity analyst at Louis Capital Markets in London and a poll participant, said in an e-mail. “There are some positive shoots that people are grabbing on to.”
Davos
The signs of greater confidence in the economic and equity outlook lend an upbeat tone to this week’s five-day gathering in Davos, Switzerland of 2,500 executives, policy makers, investors and academics. Delegates include German Chancellor Angela Merkel and European Central Bank President Mario Draghi, both of whom won praise in the poll. Goldman Sachs Group Inc. (GS) Chief Executive Officer Lloyd Blankfein and billionaire investor George Soros will also be there.
“There’s a great sense of relief we dodged a lot of bullets in 2012 — we didn’t go off the fiscal cliff in the U.S., Europe didn’t have a meltdown and China didn’t have a hard landing,” said Nariman Behravesh, chief economist at IHS Inc. (IHS) in Lexington, Massachusetts, who will be in Davos. “There are definitely pockets of good news with recoveries in North America and parts of Asia gathering momentum.”
U.S. economic activity picked up across much of the country last month, boosted by automobile and home sales, the Federal Reserve said on Jan. 16 in its Beige Book survey of business conditions.
U.S. Effect
The improvement in the U.S. is having a “positive effect throughout the world,” according to Sriram Srinivasan, chief executive officer of Wall Street Investment Management in Chantilly, Virginia, and a poll respondent.
The global economy is in its best shape since May 2011, according to the survey, with 35 percent of those contacted saying it is getting better. That’s about twice the number who say the outlook is worsening. European investors were the most upbeat; U.S. respondents the least.
“The positive wealth effect caused by rising stock markets creates a big global confidence boost,” Srinivasan said in an e-mail.
Equity market gains are expected to be widespread. More than three-in-five surveyed forecast the Standard & Poor’s 500 Index (SPX) and the MSCI Asia Pacific Index (MXAP) will be higher six months from now. The U.S. index closed at a five-year high of 1,485.98 in New York on Jan. 18 and the Asian gauge rose 0.3 percent today as of 3:57 p.m. in Tokyo.
Abe’s Election
Perceptions about Japan’s prospects have brightened considerably following the election of Shinzo Abe as prime minister last month. Abe has pledged to revitalize the Japanese economy through both fiscal and monetary means, a program generally viewed optimistically by 54 percent of respondents.
The Bank of Japan (8301) said today after a policy meeting it will double its inflation target to 2 percent and move to open-ended asset purchases starting in January 2014.
One-in-five investors say Japanese markets will be among those offering the best opportunities over the next year, the best rating the country has received since the poll began asking that question in October 2009.
A majority see the Nikkei 225 Stock Average rising over the next six months, compared with only one-in-three who thought that in November. The stock gauge slipped 0.4 percent today to close at 10,709.93.
More than three years since the start of Europe’s debt turmoil, the region’s shares are seen as doing better. More than two-in-five investors say the Euro Stoxx 50 Index and the U.K.’s FTSE 100 Index will be higher six months from now, roughly double those forecasting a decline.
Risk Appetite
“Investors are tired of low yields in safe-haven assets so equities, both in developed and emerging markets, are the natural place to look,” said Ciaran Woods, an analyst at Citigroup Inc. in London and a poll participant. “We have a reasonably constructive base for riskier assets this year.”
Forty six percent of investors intend to increase holdings of emerging market equities in the next six months, compared with only eight percent planning to reduce exposure, the survey found.
A majority of those quizzed say bonds will offer the worst returns over the next year. Almost three-in-five expect to reduce their holdings of U.S. Treasury securities in the coming six months, while less than one in 20 plan on an increase.
The yield on the 10-year Treasury note stood at 1.84 percent at 5 p.m. in New York on Jan. 18, according to Bloomberg Bond Trader pricing. Since 1994, it has averaged 4.7 percent.
Bond Returns
“The current low yield from bonds, and the potential for at least the start of talk of a rate increase towards the end of the year, could result in much worse returns from bonds compared to stocks,” Fabien Ouellette, Associate Portfolio Manager at ETF Capital Management in Toronto, said in an e-mail. Ouellette, who took part in the poll, added that his comments do not necessarily reflect his company’s opinions.
The U.S. came out on top with 38 percent when investors were asked which one or two markets would offer the best opportunities over the next year.
“The U.S. is the best place to invest for the next five years because of the commitment by the Federal Reserve to inflate the economy,” Ron Anari, who took part in the poll and who is a senior vice president at ICAP Plc. in Jersey City, New Jersey, said in an e-mail.
Fed Chairman Ben S. Bernanke, who received a favorable rating from seven out of 10 investors in the poll, has pledged to keep purchasing Treasury and mortgage-backed securities until the outlook for the labor market improves “substantially.”
China Rising
China ranked second among investors as a good place to invest in the coming year: About a third endorsed the outlook for its markets, the best performance in more than two years.
The country’s economic growth accelerated for the first time in two years at the end of 2012 as government efforts to revive demand drove a rebound in industrial output, retail sales and the housing market. Gross domestic product rose 7.9 percent in the fourth quarter from a year earlier, up from 7.4 percent in the third.
Thirty five percent of those surveyed think that European Union markets will offer the worst returns over the coming year. That was down though from 41 percent in November and 62 percent in May.
Although a majority don’t believe recent gains in European bond markets signal the crisis is over, 44 percent disagree — compared with 28 percent a year ago. Thirteen percent say they will increase exposure to the region’s sovereign debt in the next six months, almost double the November level. Fifteen percent say they will increase exposure to the euro in the next six months, up from 8 percent.
European Defaults
While 69 percent still see Greece as likely to default, that’s the smallest amount since September 2010. Thirty percent say Portugal won’t be able to pay its bills, almost half the rate of a year ago, and Spain is viewed as credit worthy by 68 percent, the most in a year. Only 12 percent say Ireland is likely to default and 17 percent say the same of Italy.
Praise for taming the crisis has been handed to Draghi for devising an as-yet-untapped bond-buying program and Merkel for accepting a continued lifeline for Greece. Seventy two-percent view Draghi positively while optimism in Merkel’s policies rose to a record 64 percent as she seeks re-election.
“I am very confident in Germany’s ability to take the leadership role,” Anari said. “Angela Merkel is a very competent leader.”
By contrast, French President Francois Hollande’s program is viewed with pessimism by 76 percent and U.K. Prime Minister David Cameron’s rating declined to a low of 39 percent. International Monetary Fund Managing Director Christine Lagarde was regarded favorably by 59 percent.
The Bloomberg Global Poll was conducted Jan. 17 by Selzer & Co., a Des Moines, Iowa-based firm. It has a margin of error of plus or minus 3.2 percentage points.
By Rich Miller & Simon Kennedy
Bloomberg