Stocktake: Markets remain sanguine over Greek threat

Markets sanguine over Greek tensions Investors could be forgiven for thinking that markets, worried by recent uncertainty over Greece, have been in risk-off mood of late.

European equities have suffered a double-digit correction, while Germany’s Dax last week fell below 11,000 for the first time since February.

European volatility, as measured by the VStoxx, is at five-month highs.

Cash levels among global fund managers are at a six-month high, according to Merrill Lynch’s latest monthly fund manager survey, while cash allocations among European money managers are at their highest level in six years.

Global equity exposure, the surveys finds, is at an eight-month low.

However, the risk-off narrative is an incomplete one. Europe remains the region most favoured by managers, a net 46 per cent choosing to overweight it. Allocations to high-flying Japan have remained steady; global investors continue to prefer riskier sectors such as technology and finance; exposure to US equities also increased last month.

Only in emerging markets has equity exposure been significantly pared back.

The VStoxx may have climbed, but it is barely above its historical average and nowhere near levels seen during past crises.

None of the 15 major market strategists tracked by Bloomberg have lowered their year-end estimates for European indices, and all see further gains in 2015.

As for Greece, just 15 per cent of fund managers expect it to leave the EU.

Investors, Merrill notes, were never positioned for a Greek worst-case scenario.

The retreat from risk has been more modest than the headlines suggest. China bulls are talking bull If there's one issue that global fund managers are largely agreed on, it's China; 70 per cent of respondents to the Merrill survey say Chinese equities are in a bubble.

Nevertheless, 30 per cent disagree, a relatively high figure, given the case for a Chinese bubble seems so clear-cut.

Bulls note the Shanghai Composite Index trades on 19 times estimated earnings – pricey, but not exorbitant, and barely half the earnings multiple that prevailed at 2007’s market peak.

However, the stats are distorted by the heavy weighting of cheap banks in the Chinese index. Some 94 per cent of stocks are pricier than the index, according to a Bloomberg piece last week.

The median stock trades on 58 times estimated earnings – more than three times as expensive as the world’s biggest markets, and much higher than that seen in China itself at the 2007 market peak.

Don’t think that China’s market madness is confined to a few hot sectors or that the current bubble is somehow less significant than its 2007 predecessor.

China’s bulls, if you’ll pardon the pun, are talking bull.

Analysts are more inaccurate Wall Street analysts may be a more honest bunch than they used to be, but their forecasts still stink.

A new study, to be published in the CFA Institute’s Financial Analysts Journal, has found the regulatory clampdown in 2002 – a clampdown prompted by analyst scandals during the dotcom bubble and crash – has done nothing to improve profit forecasts. In fact, they’ve become worse.

Prior to the changes, the average earnings estimate was off by 33 per cent, compared with 35 per cent in 2013.

Forecasts did become more accurate in the immediate aftermath of the introduction of the regulations, the study says, but the improvement was short-lived.

Why? The poor quality of company reports is one reason. Another is that analysts, knowing they were being watched, briefly made “extra efforts” before slackening off as attention “waned” over time.

Whatever the reason, the conclusion seems clear: take earnings estimates with a proverbial pinch of salt.

Plunge in equity allocation Are ordinary US investors bailing out on stocks?

According to the American Association of Individual Investors (AAII), equity allocations plummeted last month.

There was a big jump to cash, with members’ stock allocations falling from 67.9 per cent to 57.8 per cent – the biggest monthly drop in nine years.

The data, based on a small sample size of AAII members, may be unreliable. After all, allocations rarely see large moves, especially when equity markets are in a state of relative calm.

Nevertheless, sentiment polls have been oddly bearish for months now.

The latest AAII allocations figures appear suspect, but they are further evidence that ordinary investors have become increasingly suspicious of this ageing bull market.

Good mood makes bad forecast Analyst forecasts are even worse around holidays, according to a new study.

The paper, entitled Mood and Analyst Optimism and Accuracy, examined US forecasts between 1982 and 2014.

It found that analysts were more positive and make “larger errors” around major holidays such as Thanksgiving or Christmas.

The simple explanation is also the most likely one, the authors concluded: analysts “are in a favourable mood under the holiday atmosphere”, resulting in “more optimistic and less accurate forecasts”.