Rally at risk as long-term investors shun stocks

Rally at risk as long-term investors shun stocks


A glance at the shareholder register of Cadbury is revealing. It is no longer familiar UK names that control the company, but a motley assortment of US investment funds.



By Nicholas Paisner, Breakingviews.com

Published: 2:35PM BST 22 Sep 2009



This partly reflects the confectioner’s turbulent history, but it is also indicative of the changing shape of the European equity market.



A number of recent studies have shown that long-term institutional investors have cut equity allocations by as much as 40pc over the past two years. Many pension funds were net sellers of domestic equities even before the crisis, as they sought to diversify internationally and reduce risk. But by selling into the rally, and not reweighting portfolios in-line with market moves, the shift away from shares has been accelerated.



The crisis has given these investors more reason to be wary of stocks. Even on long-term time horizons, equity returns have not been attractive, with the UK’s FTSE-100 index now at the same level as in 1997. And after two bear markets in the past 10 years, individuals in defined-contribution pension schemes are understandably risk averse, prompting them to switch out of equities.



The flight of long-term money has left its mark. In spite of doubling or tripling, share prices in some sectors are still well-below their peaks. What’s more, liquidity in the mid- and small-cap stocks has plunged. This sharp decline in interest could well reflect risk-averse investors hastening their departure from these segments of the market. A large chunk of the investor base may simply have gone for good



The move by long-term investors into low-return safe havens of cash and government bonds is potentially bad news all round. For those who have not given up on equity, the exit of long-term money means that the current populace of shareholders are now a far less sticky lot. This hasn’t been a problem so far, as money has been flowing into the market on a net basis. But it could exacerbate future market wobbles.



Long-term investors could also suffer from their caution. Government bond yields are still at historical lows, albeit up from crisis troughs. The resurgent gold price suggests that the market is once again starting to fret about inflation. If rising prices do begin to take hold, bond yields could yet soar. Investors in risk-free assets may quickly start to wish they had been a little more adventurous.



http://www.telegraph.co.uk/finance/breakingviewscom/6218807/Rally-at-risk-as-long-term-investors-shun-stocks.html