Nordic pension and insurance funds are not optimistic about world growth prospects over the next six months. In fact, in nrpn’s latest quarterly survey, a paltry 7.7 per cent said they were, while 38.5 per cent were pessimistic. The vast majority were neutral at 53.8 per cent.

The figures follow a dramatic 75 basis point cut by the Federal Reserve, indicating that investors do not believe the central banks can fight off a recession. So, if a large rate cut, particularly with more expected, cannot help investor sentiment, where are concerns arising?

Scandinavian neutrality

Certainly not from the Scandinavian markets. Not a single respondent forecasted negative returns for Scandinavian equities over the next six months. Most predicted modest growth, with 63 per cent expecting first half returns of between 0 per cent and 5 per cent. The remaining funds were even more positive. Some 19 per cent feel a rise of 5.1 per cent to 10 per cent is on the cards, while another 18 per cent expect returns of an impressive 10.1 per cent to 15 per cent.

However, the real noise is coming from emerging markets. More than one-third of Scandinavian funds (36.4 per cent) predict gains of 10.1 per cent to 15 per cent, with another 18.2 per cent seeing gains of 18.2 per cent in the first half of 2008. While a small proportion (9.1 per cent) believe they will fall between -0.1 per cent and -5 per cent, the vast majority are optimistic on both their long- and short-term future. In fact, another 72 per cent believe that investing in emerging market equities will be the big trend of 2008, while 27.3 per cent of respondents said they would increase their emerging market equity exposure this year.

F&C Investments are overweight in emerging markets, particularly in Brazil, Russia and Egypt. In a statement on emerging markets, it says: “Emerging markets have performed relatively well amid the continuing global credit crisis, although the developed market recession is beginning to be priced in to emerging markets. It also cautioned that a predominant risk facing emerging markets was disruption from external factors such as escalating concerns in the US and weaker global sentiment.

However, where Scandinavian funds appear to be more nervous is in the US and Japan. While a solid 45.5 per cent of investors believe US equities will grow modestly between 0 per cent to 5 per cent, a further 27.3 per cent predict negative returns from -0.1 per cent to -5 per cent. Japanese equities have the same percentage (27.3) who predict such a fall, while 36.4 per cent predict slow growth between 0 per cent and 5 per cent. Even with the more negative sentiment towards the two classes, there were still some who were positive on their growth for the first half. An impressive 27 per cent believes both countries’ equities will rise between 5.1 per cent and 10 per cent while another 9 per cent see Japanese equities rising from 10.1 per cent to 15 per cent.

Bond evasion

It appears that the area of the most concern to funds is bonds. Nearly half of respondents intend to cut their fixed income exposure over the first six months of the year. No other asset class was as negatively perceived by investors.

Mary Miller, director of global fixed income at T. Rowe Price, says the bond market has some serious fundamental problems, particularly the US municipal bond market and the downgrading of bond ratings.

She says: “It is certainly a concern for investors, which have guidelines to invest in AAA, or very highly rated bonds. In a downgrade

situation, some of that will be challenged. There are also many investments that have been built around AAA ratings that will probably need to be unwound. I would not want to underestimate the turmoil that can result from broad-scale deterioration of these companies.

“Historically, the bond insurers covered the municipal bond market, which is a high quality market. The insurers got into difficulty when they moved outside of that terrain into credit problems that were beyond the scope of what they typically insured, such as collateralised debt obligations and taxable bond securities.”

Despite this warning, however, there remains interest on the part of Scandinavian funds for government bonds. More than a quarter (27.3 per cent) said government bonds would be most interesting to them in the first half of 2008. However, the most interesting bond class was corporate with 45.5 per cent of investors expressing interest. The class with the lowest interest were high-yield bonds at 9.1 per cent.

nrpn’s survey questioned 14 funds with more than €81bn assets under management.

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