Investors tip stocks, fret over property bubbles

The CFA Institute 2014 market sentiment survey shows Asia investment professionals are worried about real estate bubbles forming, but notably upbeat on Japan.
Investors tip stocks, fret over property bubbles

Investment professionals are more optimistic about economic growth and equity returns than they were last year, but they are also worried about potential property bubbles, most notably in China, according to the CFA Institute 2013 Global Market Sentiment Survey*.

One particularly “eye-catching” finding was the spike in optimism about Japan's prospects next year, says Paul Smith, CFA’s managing director for Asia Pacific.

About three-quarters (73%) of Japanese investors surveyed expect the local economy to grow next year, compared with only 11% in the 2013 poll.

Japanese companies surveyed were also upbeat about job prospects in the financial services industries, with 55% expecting employment opportunities to increase in 2014 for investment professionals.

Smith, having just returned from a trip to Japan, says: “They’re obviously reacting strongly to Abenomics, which is still a promise rather than a reality. But if you believe sentiment feeds into a virtuous cycle, I think this is tremendously encouraging.”

Naysayers point to the lack of detail surrounding Prime Minister Shinzo Abe's third arrow - implementing the structural reforms - and note that inflation still hasn’t picked up as expected. Yet young Japanese professionals said they are looking forward to growth and international expansion next year, “something they haven’t thought about in a long time”, Smith says.

As for the global economy, most of the CFA Institute members surveyed (63%) say they expect it to expand in 2014, up from 40% last year.

Chinese respondents remain the most cautious, with only 48% saying they expect the global economy to grow next year. This still represents a marked rise over 21% the year before.

More than half of global CFA Institute members predict a financial bubble in their home markets. In Asia Pacific, 52% view real estate as a likely bubble in local markets next year, with such concerns highest in China (77%) and Hong Kong (68%).

Such worries are understandable. Chinese authorities’ and banks’ efforts to tighten loan-to-deposit ratios are intended to cool rising real estate prices. “Thus far, it hasn’t worked,” notes Smith. “Chinese real estate prices are moving north month-over-month.”

Investment in real estate development in the 11 months to November 30 totaled Rmb7.7 billion ($1.3 billion), a 19.5% year-on-year increase, according to the National Bureau of Statistics of China.

Investors overwhelmingly expect global equity to provide the highest returns next year, with 71% (and 68% of Asia-Pacific respondents) identifying global equities as the asset class most likely to perform best, compared with 50% last year (41% in Asia Pacific).

Asked which stock markets would provide the best investment opportunity next year, respondents chose the US (26%), followed by China (10%), then Germany and Japan (both at 6%).

On the bullish outlook on equities, Smith says: “Globally the biggest thing that’s changed are people’s attitudes towards the US and Europe. In Europe, people think the worst is over – the fever’s broken, so to speak. And the US is growing quite strongly. It’s making people a lot more cheerful [on equities].”

Global sentiment on fixed income fell further, with only 4% anticipating bonds will provide sufficient returns next year, down from 8% last year.

With regard to regulatory matters, four in 10 Asia-Pacific CFA members say that to boost investor trust and global market integrity, there must be improved regulation and oversight of systematic risk. They cited coordination among global regulators as key.

“[The survey found that] we need a more sophisticated regulatory global regime,” says Smith. “But we don’t want the Chinese to over-regulate, and the regulation in the West needs to be tightened. If we’re not careful, we could globally regulate ourselves into a recession.”

Members again highlighted mis-selling of products by financial advisers as the most serious ethical issue facing their local markets in the coming year, although the figure dropped to 25% from 29% last year. Market fraud/insider trading was seen as the second most serious issue (with 24% of votes), although the figure varied widely from market to market, ranging from 11% in South Africa to 55% in China.

*The survey of all 119,817 CFA Institute members was conducted from October 2 to 17, and 6,561 responded. Of these, 59% were based in North America, 17% in Asia Pacific and 24% in Europe, the Middle East and Africa.

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