Pension and insurance funds in the Nordic region polled for our latest quarterly investor survey expect emerging market equities to turn in a mighty 9.75 per cent over the next six months. The survey took in 11 institutional investors with some €153.5bn of assets under management.

The forecasts for emerging market stocks were up by more tha 5 percentage points on the last quarterly survey, while investors’ expectations for Eurozone equities were down one percentage point to 6.5.

At the same time, 55.6 per cent of respondents expect emerging markets to be the best performing fixed income asset class over the next six months with only 11.1 per cent of investors predicting both corporate and high-yield bonds to be the top performing asset class. In the last survey, just 42.9 per cent of respondents said that emerging markets would be the best performing bond class.

Despite this, however, not one investor said that it would increase its allocation to bonds over the next six months, while three respondents revealed that they intend to cut into their fixed income holdings before the mid point of next year. Conversely, one investor said that it plans to increase its equity holdings and two intend to reduce it.

But Mike Turner, head of strategy and asset allocation at Aberdeen Asset Managers, does not think equities will perform as well next year as they have this year, although he agrees with polled investors that emerging markets will come out on top.

“Global equity market returns are likely to converge and be more modest during 2006, influenced by further tightening US Federal Reserve (Fed) policy that will be complemented by initial tightening measures in Europe and Japan,” he says. “But we continue to favour the markets of Asia and other emerging economies where we see plenty of long-term investment opportunities, although these may have a bumpy ride in the initial stages.”

“Emerging markets have done very well recently and that tends to inflate future expectations,” adds Catherine Reilly, chief economist, at Pohjola Omaisuudenhoito. “The macro economic climate is good in those regions and lots of countries are benefiting from high raw material prices. The main risk, however, is that investors’ risk aversion rises sharply and the sector takes a hit. But, unless that perception of risk changes I cannot see why emerging market equities will not outperform others.”

Additionally, the survey found that respondents allocate, on average, 40 per cent of their total holdings to equities with 47.58 per cent of their assets allocated to bonds, 7.5 per cent to property, 5.6 per cent to hedge funds, 3.5 per cent to private equity and 8.2 per cent to cash. On an individual basis, the highest allocation to fixed income was 62 per cent of total assets and the highest individual exposure to equities was 82 per cent. The lowest exposure to stocks by any one investor was 20 per cent.

As noted in the last study, funds are also very keen to raise their exposure to private equity with four investors planning to increase their allocations to the sector over the next six months and not one respondent intending to cut into its private equity holdings. In the last survey, three investors said that they planned to increase their private equity allocations and, on average, respondents allocated just 1.3 per cent of their total holdings to the asset class three months ago, compared to 3.5 per cent in the latest study.

The survey also asked investors to predict how many times they expect the Fed will increase interest rates over the next six months and, in contrast to previous findings, all respondents said that they thought the Fed would increase rates at least once before the mid point of next year with the majority of respondents (50 per cent) believing it will increase rates twice. One investor said that the Fed would increase rates three times.

“At the moment we forecast that the Fed will increase rates three times up to 4.75 over the next six months," Mads Pedersen, chief investment strategist, at Danske Capital told nrpn. "From an investment point of view it is not very important if we see rates settle at 4.5, 4.75 or even 5 per cent.

“What is important is that the labour markets remain well behaved. The biggest risk would be if the US labour market tightens so much that the Fed stops talking about neutral rates. But we currently don't think this will happen."

Out of the polled investors, 90 per cent said that they expect world growth prospects to remain positive over the next six months with one respondent expecting growth prospects to remain neutral and not one expecting growth prospects to be negative.

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INVESTORS SPLIT OVER OIL PRICE HIKES

Investors are now much more divided as to where the price of US oil will settle over the next six months – according to the results of nrpn’s quarterly investment survey, which took in 11 institutional investors with some €153.5bn of assets under management.

In the previous study all respondents said that the price of oil would end up somewhere between $55 and $64 per barrel over the following six months, while in our latest survey only three investors felt that prices would end up in that range. Indeed, the majority of investors (six) said that prices would settle somewhere between $45 and $54.

“Although numbers have come down a bit lately, we think oil prices will remain relatively high in the mid-$50 per barrel range,” says Sean Flannery, CIO for North America at State Street Global Advisors. “Particularly as we head into the colder winter months.”

Craig Pennington, global energy portfolio manager at Schroders, adds: “OECD oil demand growth rates have slowed steadily since the peak in Q2 last year, with Q3 05 growth at only 0.2 per cent. The same pattern has been seen with non-OECD demand, although this reflects extraordinary levels of demand growth in 2004 and the fact that certain Asian economies have had to raise pump prices closer to international levels. Large price increases in Thailand and Indonesia have resulted in sharp falls in product demand. But assuming prices do not rise further, such falls in consumption tend to reverse as consumers become used to higher prices.”

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Figure one: average equity market forecast returns for next six months

Figure two: average asset allocation of participants.
Figure four: how many times do you think the Fed will raise rates over the coming six months?

Figure five: which fixed income assets will become most  interesting over the next six months?