The New Year brought with it greater confidence and optimism in Australian and global equities markets, but Australian institutional investors are not shunning low-risk assets, says UBS Global Asset Management.
“We are seeing greater risk appetite, driven by European and US policymaking and a general removal of uncertainty,” UBS Global Asset Management head of fixed income Asia Pacific Anne Anderson told Investor Weekly. “Accordingly, we’ve seen equity markets rally and money flow into equities.”
The fiscal cliff negotiations in the US in particular, which avoided a sharp decline in budget deficit and return to recession, saw equities markets surge from Sydney to New York.
While the surge was clearly responsive to a specific external event – prominent US stockbroker Art Hogan of Lazard Capital Markets told CNBC that the rally was merely indicative of “pent up demand for stocks” as investors waited to see the result of the fiscal cliff deal – many analysts have projected a rosy outlook for equities and increasing stomach for risk.
And yet despite the optimism surrounding equities, Ms Anderson says that Australian institutional investors – especially super funds, which she describes as having been “extremely quiet” of late – are unlikely to turn their back on fixed income assets.
“Even though equity markets rallied at the end of last year, we’re not seeing Australian instos reallocating money away from fixed income, and that’s largely a reflection that bond yields are not likely to increase dramatically,” she said.
Indeed, UBS Asset Management has identified a “secular shift” occurring in the insto space, whereby allocations in fixed and relative income have been allowed to passively drift up, in contrast to 2008/2009 when investors dynamically rebalanced away from fixed and relative income into equities.
“We’re seeing a structural shift suggesting people are recognising that fixed income allocations have been low and, generally, they’re allowing them to rise, which is telling,” Ms Anderson said.
In fact, Ms Anderson expects low-risk allocations to be a key feature in the insto portfolio cap in 2013.
“Components of fixed income remain important for Aussie superannuation funds,” she said. “Credit remains the highest priority, seeking out yields in various forms. It’s fair to say we’ve already seen very strong returns, but there’s still some value there.
“In terms of priorities, I don’t see [Australian institutional investors] reducing allocations in fixed income. Relative to global peers, Australian allocations are still low, and the equity market – while it is likely to be a positive – will not be an easy positive.”
Ms Anderson advises institutional fund managers to adopt a strategy of “getting the maximum yield out of what you’ve got” by focusing on credit and a less aggressive approach to duration, supported by falling cash rates.
At the same time, Ms Anderson warns there could be surprises around the corner.
“While it’s expected that cash rates will be cut – indicating that you wouldn’t quit fixed income yet and go back to cash – I think there’s a bit of a shock to the level of nominal income in the economy ahead,” she said.
“Our relative export prices are trailing off compared to where they’ve been, and it’s unlikely that wages will increase meaningfully.
“Whether that’s enough to see a severe re-rating of the equities market – like we saw in the US at the end of last year – remains to be seen.”
