Suddenly, bloom off the rose for foreign stocks

Money managers' interest in international markets wilting as U.S. growth take center stage

Apr 5, 2011 @ 10:53 am

By Jeff Benjamin

Foreign equity markets have started to fall out of favor with U.S. money managers, according to the latest measurement of manager sentiment.

A March survey of 180 professional money managers revealed a dramatic drop in bullish sentiment for emerging-markets equities.

The quarterly research, which is scheduled to be released tomorrow by Russell Investments, measured emerging-markets bullish sentiment at 51%, down 20 percentage points from the December survey. That's the lowest level since March 2009

Bullishness for non-U.S. developed-nation equities fell 9 percentage points to 49% in the latest research.

While roughly half the money managers still express bullish sentiment for foreign equities, the dramatic shift is a positive sign for U.S. stocks, according to Rachel Carroll, client portfolio manager at Russell.

With regard to the emerging markets, she said the shift in sentiment could be the result of inflation fears on the heels of a strong rally.

“Investment managers have favored emerging-market equities for quite some time, but many believe the strong run may soon be over and the time for profit-taking is now,” Ms. Carroll said. “And the inflation issues will also hurt the emerging-market consumers.”

The non-U.S. developed-nation equity market category, which has also enjoyed a strong run, is simply losing favor in contrast to a better economic outlook for U.S. economic growth, Ms. Carroll added.

“The U.S. rate of [gross domestic product] is at 2.8%, which compares to 0.3% for Europe,” she said. “Investors are clearly expecting stronger growth in the U.S.”

Managers were most bullish on U.S. large-cap-growth stocks, which came in at 70%, down 3 percentage points from December.

On the least-bullish, or most bearish, end of the scale managers were 80% bearish on U.S. Treasuries, which compares to 83% bearish in December.

Fixed income in general also remained nearly twice as bearish as bullish.

In terms of U.S. equities, 72% of money managers surveyed described the market as fairly valued. In December, only about half thought stock prices were spot on.

In a similar vein, the number of respondents who think domestic stocks are undervalued appears to be dwindling. Only 23% of respondents said domestic stocks are still priced too low. In December, that percentage was closer to 40%.

This, according to Ms. Carroll, suggests the markets are going to favor “stock pickers.”

“We've bounced back so much that the markets are now normalizing,” she said. “This is going to favor fundamental research.”

The 5% overvalued measurement, which is the lowest it has been since Russell started conducting these surveys in 2005, implies that managers believe stock prices are reflecting their intrinsic value, Ms. Carroll said.

“This is the time when you want to make sure the manager you're using is able to tease out the prospective growth,” she said.

Concerns over rising rates are expected to affect the investment decisions of 54% of respondents. Of those managers, 30% said they plan to increase exposure to equities. Not surprisingly, about the same percentage plan to reduce exposure to Treasuries.

Broken down by sector, the biggest change was seen in financial services, which jumped 10 percentage points to 49% bullish.

“Financials haven't fully returned to fair valuations yet, because a lot of those stocks are still being punished based on perceptions related to the financial crisis,” Ms. Carroll said.

The more bullish outlook for financial-sector stocks, she added, reflects the impact of improving balance sheets and higher dividend distributions as companies pay back loans from the Troubled Asset Relief Program.

The most bullish sectors remain technology at 74% (down from 80% in December), and energy at 69% (up from 68%). Money managers are least bullish on utilities.

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