Institutional investors face the last months of 1999 with a worrying combination of rising interest ...
Institutional investors face the last months of 1999 with a worrying combination of rising interest rates, rising commodity prices, rising growth and uncertainty about inflation. A sharp correction in the US market after stronger than expected inflation data has added to anxieties about the century date change and how to position for a possible bounce early next year if investors' worst fears are not realised
"It would seem wise to go into the final months with a pretty flat book, or tactically neutral weighting," says Roger Hirst, strategist at Dresdner Kleinwort Benson. "The extent to which investors lack, or are not prepared to part with liquidity, is evidenced by the current difficulties in the new issue market. Access is pretty much closed to all but the very best quality applicants
The typical UK pension fund portfolio is now overweight overseas equities against the UK, focusing on Europe and the Pacific at the expense of the US market. Among emerging markets, interest is centred on commodity plays. They have a modest overweight position in UK bonds. Most are still running a fully invested portfolio with cash holdings of between 5% and 8
Their major concern is the future of the US equity market, which has fallen around 10% in the last three months. Mark Cliffe, chief economist at ING Barings, says: "The effects of the bursting of the US bubble would be profound
"We see it as a far greater risk than that arising form the Y2K problem
US bulls say the market is not overvalued and the rise has been driven by technological investment and increased productivity. But negative sentiment is now widespread. Sarah Arkle, head of international equities and managed funds at Threedneedle, says: "We are underweight the US and overweight Europe because it is behind the US interest rate cycle and there is more restructuring of companies to come. We remain neutral on the UK
The UK is perceived still to be strongly correlated to the US, although most funds have kept a small overweight in the equity market
The biggest beneficiary of the recent ambivalence towards the US market has been Europe, where economic growth has picked up in the 11 Eurozone countries signed up to monetary union. Following a shaky start after launch in January the euro has regained lost ground against both the dollar and the yen. The European Central Bank has pledged to be ultra vigilant about inflation, although some managers believe its stance is too hawkish
Mark Pignatelli, European Equity leader at Baring Asset Management, believes European interest rates are going to have to rise, not because of any inflationary pressure but because money supply growth has to be curbed. ECB repo tenders have gone from being six times oversubscribed to 20 times oversubscribed in the last few weeks
Europe has also benefited from some investor disillusionment with Japan, where stronger than expected GDP growth data earlier in the year prompted hopes that a sustainable recovery was at last on the cards. BAM's Hughes said Japan had been "a trader's market" over the last year, but that game was now over
Although other parts of Asia have impressed with the speed of their turnaround from the crisis of 1998, most funds are waiting until next year to venture back into more high-risk areas
Millennium bug-related effects have exacerbated developments in both the fixed income and equity markets as sovereign and corporate issuers rushed to bring offerings ahead of what is likely to be an extended shut down around the New Year
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress