For the last year or two, investors have been attracted by numerous growth stories and have poured money into emerging equity markets, but some argue that these markets are now overvalued and that there are better opportunities in the likes of Europe and the U.K. While investor sentiment towards these regions is poor, negatively affected by a swirl of political and economic stories, it is argued that their equity markets offer greater value for money.

 

Investors can become so fixated on the idea of buying 'growth' funds that they (unknowingly) bid prices up to levels where any growth is more than priced in. Therefore, with the belief that Gross Domestic Production growth ('GDP', i.e. 'output') is predicted to be comparatively low across the likes of Europe over the next couple of years, equities listed in these markets are seemingly unattractive. It is this view that may prevent your clients from missing out on what commentators call real 'embedded value', found in relatively cheap fund prices.

 

Central to the theory is the fact that it is proven that equity markets rarely share any correlation to GDP growth, because equity markets 'discount' growth well in advance (i.e. fund managers rely so heavily on economic predictions and forecasts, that an element of future growth is priced into their funds at an early stage). The Credit Suisse 2010 Yearbook, which uses 109 years' worth of data from 19 countries to analyse trends in returns and risk, shows that the correlation between GDP growth and equity returns is actually negative.

 

Despite this lack of correlation, according to the March edition of the Merrill Lynch Global Fund Manager Survey, fund managers were 21% underweight in Europe, favouring emerging markets and America, where GDP recovery has been stronger. Fund Managers with a contrary view to this would instead hold overweight positions in the likes of Britain and continental Europe - markets which, in their opinion offer embedded value (and therefore a greater chance for future growth) and are much less susceptible to asset/pricing bubbles caused by over-subscription from speculative investors.

 

Of course, all of the above can be neatly wrapped up under one heading; 'sentiment'. Sentiment is fuelled by many sources, including economic indicators, advertisers, fund managers and the media. Seen as one of the key drivers of global market movements, the power of sentiment is such that it has a massive influence over investment returns. Ultimately, it is the power of sentiment that determines which way 'the herd' (and therefore the majority of investment capital) heads.

 

More increasingly of late, however, some are of the opinion that the sentiment towards the state of a country's economy has overtaken the core fundamental to the success of fund/portfolio growth; the ability of individual companies, many with a truly global remit, to generate returns regardless of it's home-country's troubles.

 

Please contact us for specific advice about some of the opportunities which we believe currently exist