FYI | Apr 12 2012
By Greg Peel
Citi's North American equity strategists survey their institutional clients each quarter and the results of the latest survey are in, with responses from 115 fund managers.
The survey found that the consensus year-end target for the broad market S&P 500 index is now 1422, up from 1337 in the January survey. The S&P 500 closed 2011 at 1257, so insto expectations for the year's price return have increased to 13.1% from 6.4%.
We could, however, put a slightly different spin on it. The S&P closed at 1408 for the March quarter so while in January expectations were for a 6.4% gain over 12 months, in April they're for a 1% gain over 9 months. Is that more bullish in retrospect or less bullish? Interestingly, in January 60% of respondents believed a 20% rally was more likely than a 20% fall. In April those numbers are now 50/50. I suppose you can look at it either way.
The average cash holding in insto portfolios has fallen to just below 7% in April from 9% in January. Actual dollar values would be interesting here, given the rally in stocks means equities will become a greater proportion (and cash less) without a fund manager making any changes. In the April survey, more than 80% of fund managers plan to allocate more cash to equities, but this is “slightly lower” than the January survey, Citi notes.
What the Citi strategists found intriguing was that 90% of respondents did not expect a US recession in 2012 and 80% did not think QE3 would be initiated in 2012. The latter number is surprising if one is a regular watcher of US business television, given the number of guests who suggest QE3 is quite likely based on more troubles ahead in Europe.
For equity allocations, US equities are a stand-out preference, Citi has found. Latin American stocks are generating some interest and Europe is a no-go zone. Within the US, respondents like tech stocks and are staying away from utilities. Financials remain a preference and consumer discretionary names are growing in favour.
Such preferences are consistent with a bullish, or “risk on” view. Bank profitability is a direct reflection of economic growth, and so it goes that a stock market can't rally unless banks are rallying. Utilities are defensive and thus not the preference in a “risk on” climate, albeit they do offer decent yields when the US treasury is offering little in the way of yield. The US is a consumer-driven economy so one can't be bullish on the economy without assuming consumer stocks must benefit, meanwhile tech is quite simply the darling of the age. Just look at the world's biggest company – Apple.
In the same vein, the survey found gold, oil and US bonds are not attracting much interest. The majority of respondents sees gold remaining below US$1700/oz in 2012 (consistent with assuming no QE3), the oil price not exceeding US$120/bbl (West Texas, currently at US$103/bbl), and the US ten-year bond rate exceeding 2.5% by year-end (currently 2%).
All of the above does definitely sound “more bullish”. The only drawback, as I noted, is that US instos currently see only a 1% further gain in the stock index (or 4% if taken from late night's close of 1368 in the S&P). The March quarter saw a 12% rally for the S&P and rally from the October lows represented 28%.
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