By Natsuko Waki
LONDON, March 6 After a full throttle
rally since January, risky assets may be primed for a further,
although less stellar, run higher in the coming months, pulling
in new money under pressure to perform.
Average daily trading volumes in equities, bonds and
commodities are down 16 percent this year, reflecting some
investors' hesitation at joining the risk party fuelled by a
wave of money printing by major central banks.
Furthermore, investment statistics show that thin volume
rallies tend to outlive high volume stampedes.
World stocks, measured by MSCI .MIWD00000PUS, are up 10
percent this year, although the market is merely back at levels
seen at the end of last July, before concerns about European
sovereign debt and banks combined with fears of another U.S.
recession to trigger a major sell-off.
"All the evidence we look at suggests a lot of long-term
investors adopting more defensive positions have been hurt by
the timing and extent of this rally. Volumes haven't been huge,"
said Philip Saunders, head of investment strategy at Investec.
"Nothing is going to go up in a straight line, but it's not
that investors have suddenly bulled-up and positioning is at
extreme. That means it's a reasonably encouraging environment.
There is a lot of pressure for people to deliver returns."
One possible explanation for the thin volume is that
investors may want to avoid a repeat of 2011.
At the start of last year, investors encouraged by the
improving global economy went en mass into risky assets, only to
see them reverse into the mid-year due to high oil prices, the
euro debt crisis and concerns about a U.S. economic slowdown.
Many say the wall of cash - Credit Suisse estimates excess
liquidity in the developed world to be $8 trillion - will create
asset inflation in the immediate future, before it translates
into general inflation problems in the long run.
2012 Asset market performance link.reuters.com/muc46s
2012 Hedge fund performance link.reuters.com/kuz46s
MISSING THE PARTY
According to most recent data from the U.S. Securities
Industry and Financial Markets Association, average daily
trading volumes in broad U.S. bond markets fell 7 percent on the
year to $879 billion to end-January.
Order book turnover on Xetra, Deutsche Borse's electronic
trading platform for equities and bonds, fell 9 percent on the
year in February to 96.4 billion euros.
At Eurex derivatives exchange, an average daily volume in
international derivatives fell to 8.7 million contracts in
February, down from 10.3 million a year ago, with equity and
interest rate derivatives volumes both posting a decline.
Based on U.S. stocks, Treasuries, Bund futures, oil, gold
and copper futures, JP Morgan says average daily trading volumes
in these asset classes are down almost 16 percent this year,
while U.S. high grade and high yield credit volume is down
around 4 percent, compared with the same period last year.
Nomura, which analyzed volumes and performance in European
stocks in the past six years, found that low volume rallies such
as the current one tend to last longer than the high volume
rallies which are prone to reverse.
All the high volume rallies in 2007 and 2008 reversed in the
following six months, by falling as much as 35 percent. Out of
the five low-volume rallies since 2006, only one was followed by
Coupled with stock correlation which fell sharply from an
all-time high in the fourth quarter of 2011, Nomura said stock
picking is likely to become a more profitable exercise and flows
into active funds relative to passive would pick up.
Equity allocation at Deutsche Bank Private Wealth
Management, which manages assets for often conservative wealthy
clients, now stands at 39 percent of their portfolios, up from
33 percent seen during a risk sell-off in August and September.
But it still has 11 percent in cash, compared with last
year's low of just 3 percent seen in the March-April period.
"The secular story in the West is still problematic but
cyclically it's in the upturn," said Kevin Lecocq, chief
investment officer at the Deutsche PWM.
"In the short term - that means a couple of years - we're
constructive on the world, although we may not see a turbo
charge we've just experienced."
Hedge funds, whose buying and selling activity often adds to
the trading volume, have also been slow to start.
The average gearing ratio for hedge funds hit the lowest
level since August 2010 of 1.22 in January before ticking up to
1.49 last month, according to Bank of America Merrill Lynch.
Their net exposure to equities stands at 34 percent, compared
with a post-crisis high of 40 and a pre-crisis peak of 56.
Deutsche's research shows the percentage of hedge funds in
the 0-0.25 net equity leverage band remained high, reflecting
their cautious outlook.
"There is a lot of pressure, especially on hedge funds, to
deliver returns. Investors have had pretty dismal returns. If
markets are rising, they expect you to participate in that.
You've got to make hay while the sun shines," Saunders said.
"If general market beta is supportive, what's the point of
paying high fees? If you deliver low returns if you have high
fees, you have a lot of headwinds."
(editing by Ron Askew)
((email@example.com)(+44 207 542 6721)(Reuters
Keywords: INVESTMENT VOLUME
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