Dow Continues To Hit Record Highs On Hopes For Yellen's Policies
Andrew Burton/Getty Images
By Natsuko Waki

LONDON -- Global stocks may be running out of room to rally further after a bumper year as the fragile economic recovery and the prospect of a cut in the Federal Reserve's bond buying discourage big investors.

Equities are the best performing asset so far in 2013, with the benchmark MSCI world equity index rising 17 percent since January. Wall Street and some European indexes have been hitting record highs on a daily basis.

This year's rally is unique because it has been mainly driven by mutual funds and retail investors. They have been able to sustain inflows by reinvesting their income, as cash-rich corporates not confident enough to expand their businesses increase dividends and buy back shares to reward shareholders.

In contrast, institutional investors -- who collectively manage $56 trillion, or 70 percent of global investment assets -- have yet to fully embrace this year's "Great Rotation" move into equities out of bonds.

Fund managers surveyed by Bank of America Merrill Lynch (BAC) had a relatively high 4.6 percent of their portfolios in cash this month, while the number of investors saying equities are expensive hit its highest level since January 2002.

Data from JPMorgan (JPM) shows pension funds and insurers in the United States, Japan, Europe and Britain have actually bought $230 billion of bonds in the first half of this year and sold $20 billion of equities.

"Right now we're sitting in our overweight equity positions. We wouldn't buy more. In the short term the market will be sensitive to all the tapering questions concerning the Fed," said Benjamin Melman, head of asset allocation at Edmond de Rothschild Asset Management in Paris.

"If you look at valuations, there's a far less room for maneuver compared with what we had previously. We probably won't see the same kind of performance on equities next year."

The ratio of equity prices to expected earnings over the next 12 months for the S&P 500 index is currently 14.8 -- the highest since 2010 and above its long-term average of 13.9.

The same measure for Stoxx Europe 600, at 13.3 percent, is at a four-year peak and notably above its average Of 12.0.
So far this year, global equity funds have drawn $229 billion of inflows or 3.7 percent of total assets under management, with Europe attracting inflows for 20 consecutive weeks, according to Bank of America data to Nov. 13.

Bonds drew just $15 billion, or 0.5 percent of assets under management, while money market funds had $95 billion of outflows, equivalent to 2.9 percent of assets under management.

Respondents to the Bank of America survey said G7 bank lending growth and Chinese and Asian growth are the missing catalysts for further gains.

"Investors want to be involved in stocks but they are not fully invested," Bank of America's European investment strategist Manish Kabra said. "What will turn reluctant bulls into raging bulls? We need to see more bank lending growth in the G7."

Bank lending in the United States and Japan is accelerating, but European banks are still shrinking their balance sheets and cutting back on loans.

There is also a long-term incentive for institutional investors to avoid equities because of regulatory changes that require funds to take on extra capital when they increase holdings of risk assets.

"There's more regulatory burden to hold equities for institutions," Rothschild's Melman said.

Tapering Threat

Renewed discussion about when the Fed will start to scale back its monetary stimulus could prompt selling of equities as it would lead to higher U.S. Treasury yields.

Comments this week by next Fed chief Janet Yellen making plain she would keep the U.S. central bank's easy monetary policy until a job-creating economic recovery was in place have pushed stocks back towards five-year highs.

A string of U.S. data pointing to a stronger recovery had recently prompted markets to revise their expectations of when the Fed will begin to taper to early as December from March.

Societe Generale says U.S. stocks will come under pressure if the equity risk premium -- the excess return that investors require to hold stocks over risk-free bonds -- normalizes to its long-term average of 3.9 percent from the current 4.6 percent and bond yields to rise to 3.9 percent by end-2014.

"Rising bond yields during period of economic recovery are not necessarily bad for equities," SG said in a note to clients.

"However, at a time when earnings momentum remains weak and the consensus earnings growth estimate is expected to moderate, rising bond yields could be a catalyst for a U.S. equity market correction."


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pdbliz

People,,,Like it or not,,,BUSH is gone...Let him ..Clinton and others that have long time been out of office,,,LIVE there lives...
BUSH IS GONE.!!!!!!
SCAMMER OBAMA AND LIER IS IN OFFICE NOW........give me all the negitives you want,,,does not hurt my feelings.
I THINK ALL PRESIDENTS,,,REBUBLICAN AND DEMOCRATE are hand picked way before the elections........THE SUPER RICH AND WORLD ORDER PICKS THE MAN TO BE THE LEADER OF THE,,ONCE,,,,,FREE WORLD.!!!!

November 18 2013 at 9:31 AM Report abuse +3 rate up rate down Reply
willypfistergash

It alll depends on yellen and the bond purchases.

November 18 2013 at 9:05 AM Report abuse +1 rate up rate down Reply
1 reply to willypfistergash's comment
jdykbpl45

Yellin is now blowing the bubble.

November 18 2013 at 2:50 PM Report abuse +1 rate up rate down Reply
geraldlsolis

This same article has been written over and over again for the last three years while the stock market has doubled and tripled with no end in sight. A lot of people who ignored these naysayers have made a ton of money in the stock market this year, and last year, and the year before, with each year rising 20% or more. And the other people are saying shoulda, coulda, woulda.... and they cover their failure to have taken advantage of this bull market by saying "it's going to crash any day now!"

November 18 2013 at 8:42 AM Report abuse rate up rate down Reply
1 reply to geraldlsolis's comment
dweeeb.buster

Except the article says nothing remotely like "it's going to crash any day now!"

November 18 2013 at 9:19 AM Report abuse +2 rate up rate down Reply
pdbliz

Has anyone heard of .....ROCK BOTTOM,,,,,,,???????

November 18 2013 at 8:10 AM Report abuse +1 rate up rate down Reply
1 reply to pdbliz's comment
teaparty2implode

Yeah,....we experienced that when the economy collapsed under Bush.

November 18 2013 at 8:49 AM Report abuse -1 rate up rate down Reply
3 replies to teaparty2implode's comment