We're halfway through 2015, so it might be interesting to establish whether investor attitudes at the outset of the year now seem prescient in light of subsequent events. We've sifted through a number of first-half investor surveys by the likes of Credit Suisse, Baker Tilly and Franklin Templeton to try and identify commonalties and determine if shared sentiment provides any meaningful pointers for the remainder of the year.
Around three-quarters of UK retail investors believed the domestic equity market would register an overall gain through 2015. No doubt this was linked to expectations that the European Central Bank (ECB) was primed to embark upon a large-scale quantitative easing (QE) programme, but there are obviously other factors at play. Following on from a volatile performance in the final quarter of 2014, the UK benchmark seemed to support the majority view - at least initially.
The ECB duly stepped up its sovereign bond purchases midway through March. The mere likelihood of QE significantly improved investor sentiment towards underperforming European markets, such as France and Spain, although any benefits flowing through to the UK equity market appear to have been short-lived. The FTSE 100 breached the 7000 point mark for the first time since its inception in 1984, reaching an intra-day high of 7122.74 on 27 April. (According to some City analysts, it represented a "psychologically important" hurdle for investors, although nobody seemed quite sure why.) Unfortunately, the index has since slipped below its 200-day moving average - perhaps a seasonal effect - but we think it unlikely that a similar proportion of respondents would now still feel quite so confident over the trajectory of the UK index.
Confidence with shallow roots
According to a review published by Franklin Templeton, an overwhelming majority of retail investors were confident of a favourable outcome for the year, but there was also a marked increase in the number of punters reverting to a more conservative investment strategy. Based on this, you could argue that positive expectations over the performance of the UK equity market, although widespread, have shallow roots. It could also indicate that investors are sceptical about whether the lofty equity valuations underpinning the UK benchmark accurately reflect prospects for its constituents - but is this view supported by the numbers?
The FTSE 100 is registering a PE ratio of 21. That's well short of the lofty peak multiple of 30 achieved at the tail-end of the 1990s, but somewhat in advance of its long-term average of 15. Ostensibly that might suggest that the index is set to retrace, but the rating doesn't seem at all preposterous when you factor in the dividend yield of 3.8 per cent with a current earnings yield (the inverse of the PE ratio) of 4.7 per cent, against an annualised total return of 7.4 over the past 10 years.
It's worth noting that the price-change component of the annualised 10-year return amounts to just 3.2 per cent, underlining, therefore, the relative importance of the benchmark's income stream. And a surprising proportion of FTSE 100 constituents - just under a fifth - report in US dollars. During 2014, those companies accounted for around 36 per cent of the total payout - a disproportionate contribution on the back of a strengthening greenback. Although a dollar is now equivalent to 63p sterling, against 66p in May, the dollar-sterling rate remains favourable for UK shareholders of those companies that report their dividends in US currency. Arguably, this should support retail investor expectations for the FTSE 100, although whether it informed their collective view is anybody's guess. (When asked which single asset class they plan to invest in to generate a regular income, one-in-five investors say they will invest directly in equities.)
An anomalous outlook
The somewhat anomalous attitude of UK investors - expectations of higher returns/increased circumspection - was mirrored in a survey of global investment trends published by Schroders: "the survey reveals a significant disconnect between expected returns and the appetite that investors have for risk, with many favouring shorter-term returns and lower-risk assets." The Schroders findings support a positive view of global share markets, although they're tempered by reference to a "subdued" outlook for emerging markets (with US$ strength symptomatic of the malaise). A separate study by global asset manager Legg Mason revealed that investors were planning to cut their exposure to emerging markets in 2015, as key markets such as Brazil and Russia show few signs of revival - hardly surprising in the case of the latter.
These reservations again appear warranted by subsequent performance, although emerging markets indices staged a minor rally towards the end of the first quarter. Nonetheless, the MSCI Emerging Markets index is still bumping along 20 per cent adrift of its five-year high point. And recent analysis from Bank of America Merrill Lynch reveals that global investors have cut down their exposure to emerging markets in the wake of a poor corporate earnings outlook, a slowdown in the Chinese economy and aforementioned dollar strength. (India remains the preferred option for global investors among emerging markets, even though risk appetite has waned of late.)
Waiting on the Feds
These markets were obviously buoyed by the US Federal Reserve's QE programme, but subsequent market intervention by the ECB and continued stimulus measures from the Bank of Japan have not had a commensurate impact on the world's growth markets. The near-certainty (as we've been hearing for almost a year) of a US rate rise has also weighed on sentiment towards emerging markets. (One can't help get the feeling that the US Federal Reserve would simply prefer that markets continued pricing-in an increase in the US Federal Funds Rate - without it having to actually follow through with one.)
As you might expect, investor attitudes towards equity returns are much more positive for emerging - specifically Asian - markets over the long haul. The Franklin Templeton figures show that a third of UK investors think the domestic market offers the best prospects through 2015, while fewer than a quarter of the respondents plumped for Asia as the preferred destination for short-term capital. Predictably, these results are reversed over a 10-year period. It feeds into the prevailing narrative that if you're looking for growth opportunities, you'd best turn eastwards.
Small is beautiful
If you've been on the hunt for enhanced returns lower down the FTSE food chain, by now you might be pleasantly surprised. Or at least that's the general takeaway from an investment survey produced by Baker Tilly in conjunction with YouGov. Most fund managers willing to offer a short-term view of the FTSE Small- and Mid-Cap space said the year was likely to be characterised by "reasonable, if unspectacular performance".
The May general election was cited as a potential bugbear for investors, while managers also raised the spectre of a reduction in both liquidity and on-market funding in response to increased risk aversion. In the event, these worries now appear overdone - at least for the time being. The FTSE Small- and Mid-Cap indices have both risen 9 per cent since the start of the year, but that progress will be put to the test during the upcoming interim reporting season, when the extent of underlying earnings growth comes under the microscope.
