Institutional investors in Europe plan to reallocate their portfolios in the next 12 months adding equities and alternative investments at the expense of developed market sovereign debt, says AllianzGI.
A new survey has found that, like their global peers, around 30 per cent of European investors said they want to increase their allocation to international equities, with just six per cent wanting to reduce their position.
Emerging market equities are also on the buy list of 21 per cent of the European respondents (global 25 per cent), with just five per cent (global eight per cent) looking at reducing their allocation. Investor appetite for domestic stocks is positive too, although to a lesser extent, with 19 per cent (global 21 per cent) planning to increase and 12 per cent (15 per cent) planning to decrease their allocation.
By types of investor, the survey found European insurance companies are more likely to increase their allocation to international equities than other types of institution, including European banks. 39 per cent of respondents from the insurance sector plan to increase their allocation to international equities (with only two per cent planning to reduce their allocation), compared to 27 per cent of respondents from European banks (with six per cent planning to decrease their allocation). In contrast, insurance companies in Europe will on average reduce their allocation to domestic equities (+16 per cent, -26 per cent) while banks seem to be preparing to do the opposite (+21 per cent, -7 per cent).
Karl Happe, chief investment officer for insurance related strategies at Allianz Global Investors Europe, says: “The fact that insurers plan to reallocate towards international equities clearly shows that they are - despite regulatory constraints - actively pursuing strategies to stabilise investment outcomes for their clients and decrease their dependency on interest rate levels. However we shouldn’t expect the high share of respondents planning to increase their international equities allocation to have an immediate impact on overall volumes. This is likely to be a gradual shift, since the planned Solvency II risk capital loads will have a limiting effect on insurers’ exposure to equities.
“In our experience, infrastructure debt can be a better substitute for sovereign debt, due to its stable returns and liability matching characteristics – in fact the RiskMonitor survey shows strong signs of increasing allocations to this relatively new asset class, particularly in the UK.”
There are significant variations on country-by-country analysis in the latest RiskMonitor.
In the UK, institutional investors, like their international peers, show the highest level of interest in international equities, with 29 per cent of the respondents planning to increase and 4 per cent planning to decrease their allocation. With the ‘infrastructure challenge’ very much front of mind in the country, UK investors are far more interested in infrastructure debt than their peers in Europe: 14 per cent of UK investors plan to allocate more to this asset class (8.7 per cent across Europe). High yield bonds is the asset class that UK investors are most likely to reduce over the next 12 months, with 32 per cent of the respondents saying they plan to reduce their allocation to this asset class, with just nine per cent planning to increase.
Andrew Wiggins, head of AllianzGI’s institutional business in the UK, says: “Talk of a ‘great rotation’ remains somewhat alien to our day-to-day experience of investment patterns in the UK. But it is interesting that this survey has found institutional investors in our market are looking to increase their allocations to international equities at the expense of high yield bonds and developed market sovereigns. This is perhaps partly a response to potential interest rate rises and partly as investors see equities as a smarter way to take risk in the current environment. UK investors are also being drawn to the stable, predictable cash flows offered by infrastructure debt. As understanding of its attractiveness as a long-term investment increases, we expect infrastructure debt to continue to grow as an asset class in the UK.”
In Germany, institutional investors’ appetite for international equities is strongest with 27 per cent wanting to increase their allocation and no intentions to reduce allocation. Nearly 28 per cent of the respondents in Germany (compared to 16 per cent in Europe and 15 per cent globally) want to increase their allocation to EM corporate bonds with about six per cent wanting to reduce allocation (compared to eight per cent in Europe and 10 per cent globally). Compared to their European and global peers there seems to be particular appetite for domestic equities with 26 per cent of the respondents planning to increase and nine per cent planning to decrease allocation. German investors are most likely to reduce their allocations in commodities and developed market sovereign debt.
In France, institutional investors’ appetite for emerging market equities is strongest (also compared to European peers) with 36 per cent wanting to increase their allocation. 27 per cent of the French respondents said they plan to increase their allocation to international equities with nine per cent wanting to reduce their exposure. EM corporate bonds rank third, with 19 per cent (compared to 16 per cent in Europe and 15 per cent globally) saying they plan to increase their allocation and 5 per cent wanting to reduce their allocation (compared to eight per cent in Europe and 10 per cent globally). Compared to their European and global peers there seems to be particular appetite for domestic equities with 26 per cent of the respondents planning to increase and nine per cent planning to decrease their allocation. French investors are far more likely to reduce their allocations in developed market sovereign debt (38 per cent of the respondents) compared to their international peers.
In Italy, institutional investors’ appetite for domestic equities is strongest, with 38 per cent wanting to increase their allocation and no respondents intended to reduce their allocation. Nearly 29 per cent of the respondents in Italy plan to increase their allocation to international equities with 14 per cent wanting to reduce their allocation. In contrast to their international peers, Italian investors are likely to reduce their allocation to direct real estate holdings.
At 22 per cent of respondents, institutional investors in the Netherlands show far greater interest in increasing allocations to infrastructure equity and direct real estate than their peers in Europe and globally. Dutch investors also plan to increase their allocation to EM equities and EM corporate bonds. In contrast to most of their international and European peers, one out five of the respondents in the Netherlands plans to reduce the allocation to domestic equities.
Institutional investors in the Nordics are also likely to prop up their holdings in international (+26 per cent, -16 per cent) and emerging market (+16 per cent, -0 per cent) equities, but also show highly distinctive patterns compared with their peers in Europe and globally - their appetite for hedge funds is remarkable. Around 24 per cent of the respondents (vs. 10 per cent in Europe and 14 per cent globally) said they plan to increase their allocation to hedge funds (with no respondent planning to decrease their allocation) over the next 12 months.
In Switzerland, institutional investors show a particular interest in alternative assets, particularly commodities with 36 per cent of the respondents planning to increase their allocation, followed by direct real estate, international and EM equities (all 27 per cent). Swiss investors expressed the least interest in high yield bonds with 27 per cent of the respondents wanting to reduce allocations to that asset class. The emerging markets theme seems to resonate well with Swiss investors with a quarter of the respondents planning to increase allocation to EM sovereign and EM corporate debt.