The expected change in monetary policy is the most important concern for the investment professionals who responded to the survey conducted by CFA Institute. We also asked what respondents expected for the equity risk premium over the coming 12 months and looked at barriers for investment in Africa and the expected developments in the international currency markets over the coming year.
The survey was conducted in October in anticipation of this year’s European Investment Conference. CFA Institute invited 7,000 members in Europe via e-mail to participate. We received 200 valid responses for a response rate of 3% and a margin of error of ±6.8%. The top job functions of respondents are portfolio manager (20%), research analyst (9%), risk manager (9%), strategist (7%), and investment banking analyst (6%). The majority of respondents are located in United Kingdom (20%), Germany (15%), Switzerland (12%), and France (6%).
Let’s look at the survey results in more detail.
The Most Important Emerging Theme in the Markets
Given the focus on monetary policy and economic recovery in the United States, it probably comes as no surprise that the majority of respondents (58%) named “an end to easy monetary policy” as the most important theme emerging in the markets right now. The risks posed by China’s slowing growth received the second largest number of votes (35%), while the third most popular answer, rising bond yields (33%), seems closely related to the concerns about monetary policy.
Survey participants were able to select more than one answer, which is why these numbers do not add up to 100%, but the fact that only 5% of respondents chose “Other” shows that financial professionals share many of the same concerns.
Expected Equity Risk Premium in the Next 12 Months
More than half of the respondents think that the equity risk premium, the extra return that investors demand over and above a risk-free rate, will be 4–5% for the next 12 months. Using the difference in compounded returns on US stocks and on 10-year US Treasury bonds, professor Aswath Damodaran estimated the average equity risk premium for US stocks from 1961 to 2012 was 4.02%.
A rising equity premium shows the triumph of fear over hope (and vice versa), but whether the respondents are bullish (bearish) on the stock market depends on whether they expect the premium to decrease (increase) from their current estimates.
Barriers to Investing in Africa
Survey respondents named economic governance as the key barrier to investing in Africa, showing less concern for economic fundamentals. The four largest barriers named were as follows:
- Lack of sufficient information and illiquid markets (29%)
- Insufficient legal protection for investors (23%)
- Corruption (21%)
- A poor perception due to political risk (15%)
Respondents were least concerned about poor perception due to humanitarian issues (only 1%).
Size of Active Investment Management
A growing body of academic literature has cast doubt on the ability of fund managers to beat the market consistently, and a clear majority of respondents (60%) agreed that the aggregate size of active management is larger than what could be justified by financial performance.
While passive investing is reportedly on the rise, available estimates suggest that actively managed funds still dominate the market place. This survey confirms that there is cynicism within the ranks of the investment profession regarding active management’s ability to deliver alpha for its clients. The debate on active-versus-passive investing is far from resolved, however.
The Most Likely Outcome in International Currencies
Amid the chatter about currency wars, 38% of respondents think that the most likely scenario is competitive currency devaluation by major blocs.
There is, however, no agreement among the respondents as to the most likely outcome, with answers including a strengthened Chinese renminbi (20%) and weaknesses in the commodity-linked currencies of Australia, New Zealand, and Canada (16%).
Earlier this year, at one of our conferences, Avinash Persuad noted that devaluation provides no long-term solution and what drives currency is not growth or interest rates but inflation; he went on to say that inflation is highly political, as it helps determine allocation of wealth in a country.
The Most Important Lesson from the Financial Crisis
The most important lesson learned from the financial crisis, according to 31% of the respondents, is that short-termism is not sustainable. That should not come as a surprise to anyone working in financial services.
But there are other lessons: there are flaws in the regulatory system (25%) and financial incentives need to be better aligned with duties to clients (24%). In fourth place, still managing to attract 14% of the responses, was the concern over too many agents and vested interests.
All of these lessons are arguably important, and it will be interesting to observe how future regulation and market structures will embed these lessons to avoid a repeat of the global financial crisis.
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
