The credit crunch has not gone unnoticed among Nordic pension and insurance funds. Three months ago respondents to nrpn’s quarterly investor survey predicted Asian (excluding Japan) and emerging market equities would pull in returns of almost 5 per cent over the subsequent six months, but in our latest survey those forecasts have come down by half.

Also, for the first time since we have been conducting our quarterly studies, one investor expects world growth prospects to be negative. That said more than 50 per cent of respondents still expect world growth prospects to remain positive over the next six months while 23 per cent of investors plan to increase their exposure to equities going forward.

“We expect to see continued high levels of volatility in the financial markets and heightened uncertainty about the deteriorating macro-economic outlook,” says Bob Doll, chief investment officer for global equities at BlackRock. “Having said that, we believe concerns about a US or global recession is exaggerated. The non-financial corporate sector remains in a strong position, enjoying solid profitability, healthy balance sheets, and few signs of excess investments. That should help prevent a hard landing.”

Unsurprisingly, investors were most pessimistic about US stocks with forecasts down from 1.79 per cent to 1.6 per cent. Forecasts for European equities fell from 3.93 per cent to 2.5 per cent and Japanese equity market predictions fell from 3.21 per cent to 2.1 per cent.

“Although Japanese equity markets have been affected by concerns over the fall-out from US sub-prime mortgage lending, prompt action by the Federal Reserve to cut the discount rate has been positive,” says F&C. “Despite the prospect of further fluctuations we believe the impact of sub-prime issues on economic fundamentals in Japan is likely to be limited, particularly if corporate earnings continue to recover.”

Keeping the faith in equities

Despite the mortgage crisis, however, 23.1 per cent of investors intend to increase their equity market holdings before April next year and just two investors plan to decrease it. At the same time, 53.8 per cent of investors plan to raise their private equity exposure over the next six months, 15.4 per cent intend to increase their commodity holdings and a third plan to invest more in hedge funds. One investor plans to increase its allocation to property.

“The resultant re-pricing of risk and increased cost of debt caused by the sub-prime crisis is likely to restrict property price growth even further,” says Alessandro Bronda, head of investment strategy at Aberdeen Property Investors. “Whilst markets across Europe continue to benefit from huge levels of liquidity from pension funds increasing their exposure to domestic and overseas property; market activity by highly leveraged investors will fall as the costs of borrowing rise. However, on the flipside the credit crunch should help to reduce the development pipeline in the mid- to long-term, which in turn will limit supply and be positive for supporting rental growth.”

He adds: “Within the Nordic region, the office sector remains particularly attractive due to signs of continued strong demand, rising rents and good overall employment growth prospects supporting longer term future rental growth.”

We also asked investors how interested they were in timber as an asset class and 15.4 per cent said they were very interested in it, while almost 70 per cent said they were not interested in the investment class.

Søren Andersen, CEO of the Danish consultant Invensure, says: “Not every pension fund has been investing in forestry but quite a few have. My guess is that we will see an increase in non-domestic investments going forward.”

Out of the 13 polled investors, which have more than €115bn of assets under management, 7.7 rated their external managers’ performance as very good, 38.5 per cent as good, 46.5 per cent as satisfactory and 7.7 per cent as poor.

Figure one: Expected changes in current asset allocation over the next six months

Figure two: Average market forecast returns over next six months

Despite recent rate cuts by the US Federal Reserve (Fed), 15.4 per cent of investors believe the Fed will increase interest rates three times over the next six months.

The majority (76.9 per cent), however, believe the Fed will leave rates unchanged. “Attention is now focused on the Federal Reserve, and the debate has shifted from wondering whether the Fed will cut rates to how far it will cut them. In our mind, a more forceful change in policy could be warranted to prevent the US economy from sliding into recession,” says Bob Doll, chief investment officer for global equities at BlackRock.

"On balance, we believe that the Fed will cut rates from the current level of 5.25 per cent to 4 per cent by year-end and then leave rates unchanged for some time," adds ABN Amro Bank’s chief economist Joost van Leenders.

Meanwhile, 61.5 per cent of investors believe the European Central Bank (ECB) will increase rates just once over the next six months with the rest expecting the ECB to raise rates twice. In our last survey 15.4 per cent of respondents expected the ECB to increase rates three times.

Figure five: number of times investors predict the Fed and ECB will rise interest rates over the coming six months

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