In his Monday Morning Musings note, Citi’s Tobias Levkovich shares the results of conversations he’s had with over 100 institutional investors all around the world over the last month.
There are a few particular concerns they overwhelmingly cite.
The first is kind of a duh: inflation. More specifically, the impact of rising commodity prices is on everyone’s mind. How surging commodities impact central bank policy, specifically the Fed is a huge question.
Closely related: corporate margins.
As this chart shows, if margins are on the wane, stocks are likely to follow:
And finally, investors have been caught flat-footed by the outperformance of US and European markets, when many had bet heavily on emerging markets.
The emerging markets/developed markets rotation clearly has impacted almost every investor we met around the globe. The outperformance of Europe and the US has surprised many money managers who were loaded up on EM trades and their underperformance has been painful which showed. There is much discussion about money flows switching back to the US as weekly mutual fund flows have moved decidedly west . That combined with the potential for more money flow movement away from bonds to stocks makes them very nervous about standing in the way of a possible tidal wave of cash. While most investors expressed a strong desire to maintain their long EM positions and indeed appeared to be digging in their heels, one might say that they are timid holders currently and could become further sellers if this “pain trade” keeps going against them.
What’s particularly interesting is this comment. Everyone thinks everyone else is bullish:
We were somewhat surprised that investors were convinced that everyone allegedly was becoming bullish on the US, as they cited stronger economic growth expectations and the 30% gain in markets since the July/August 2010 double dip fears receded. Yet, our Panic/Euphoria Model (see Figure 13) does not argue for any such euphoric attitudes, though complacency may be a more accurate description versus the panic seen last summer. Nonetheless, the rolling four-week average flows into equity mutual funds does show more inflows than we have seen since 2007 and individual investors now are chasing stocks after an essential doubling of the S&P 500 from its early 2009 lows. In addition, we have seen flows start to favour growth and aggressive growth funds for the first time in a very long time, underscoring a willingness to take some risk again. However, a shift towards growth stocks is the right strategy if margins are peaking, in our opinion. Therefore, we are not overly worried by this development.