Following fraught negotiations, Greece has been thrown a four-month lifeline in the form of a bailout extension and this has been a large contributing factor to the market’s strength.
What’s more, central bankers are continuing to extend a helping hand to markets, offering promises of low interest rates in the US and the UK with quantitative easing from Europe and Japan.
Federal Reserve chair Janet Yellen instilled yet more confidence in investors on Tuesday, following her comments at a semi-annual testimony to Congress.
Her commitment to being flexible when deciding to raise interest rates propelled the Dow Jones and S&P 500 to close at record highs, which has left investors worldwide rubbing their hands.
It goes without saying that markets seem to be in a very bullish mood right now, especially when you add to the above the German DAX hitting a record high this year and Japan reaching highs in recent weeks.
Performance of indices over 5yrs
Source: FE Analytics
However, Psigma has since reduced its holdings in the Lazard Global Equity Income and Jupiter Japan income funds to move its equity allocation back to neutral. So why is the firm booking profits when the conditions appear promising?
Tom Becket, chief investment officer at Psigma, said: “Our view is that if you start with a decent weighting in equities at the start of the year and that weighting has become higher through profits, it makes sense, given that the outlook is still relatively questionable, just to take in a few profits and move some fire power to the side lines and await better opportunities.”
He explains that, while he can justify the recent move higher in the markets and expected it, he believes markets are now in for a period of consolidation or a correction.
Becket added: “Sentiment data, such as hedge fund positioning, hints at short-term over-exuberance and with the latest corporate reporting season patchy rather than strong, we feel a pause for breath is justified.”
“It’s not a case of being bearish, it’s just recognising that expectations and aspirations and quite high, and there’s better opportunities elsewhere.”
Last week, Bank of America Merrill Lynch’s Fund Manager Survey found that fund managers have increased their allocations to equities to a net 57 per cent overweight, which is up six points month-on-month.
This bullishness seems to be heavily focused on the eurozone, according to the survey. A net 42 per cent of regional fund managers intend to underweight the UK and Switzerland this year, while Swedish investments are also looking unfavourable.
The survey, which consists of 157 participants managing a collective $459bn, suggests investors are becoming exuberantly bullish. But is this confidence misplaced?
BofA ML European equity and quantitative strategist Manish Kabra said: “Sentiment has gotten ahead of the fundamentals on European equities. It is as if there is not a single bear left. We will need to see a strong recovery very soon to keep the bulls happy.”
However, while Becket expects to see further progress in the European equity markets this year, he doesn’t believe that such investments are fool-proof.
He said: “Following a great start to the year, investors should probably book some profits and reassess the potential for corporate profits in the year ahead.”
“Equity indices are suggesting that the world has become less risky in the last few months, but a lack of a decisive resolution in Europe, ongoing issues in eastern Ukraine and full valuations of many asset classes hint that 2015 is likely to remain volatile.”
Interestingly, the Bank of America survey found that 32 per cent of participants fear that geo-political crisis will be the biggest potential risk to markets this year.
Nevertheless, confidence in equities has increased since last month, with only 2 per cent of fund managers fearing that we are in an equity bubble. This fear has more than halved since January.
While many investors have had their confidence boosted through Europe, Becket believes that the American market could become a weak link.
He said: “Equity markets have generally pre-positioned for an earnings recovery that we feel will be hard to achieve in the US, where earnings are likely to disappoint this year due to the translational effects strong dollar and impacts from the major reduction in energy companies’ capital expenditure.”
“We certainly feel that profits in Europe, the UK and Japan can meet analysts’ expectations and in some cases surprise to the upside, but markets have arguably already second-guessed this.”
Not all asset allocators are calling a pause in the equity bull run. Patrick Moonen, multi-asset senior strategist at ING Investment Management, believes investors should focus on cyclical stocks rather than view the market as a ticking time bomb.
Moonen said: “Global macroeconomic data is improving and this observation may start to shift investor preferences towards more cyclical, high beta sectors. There are also other indicators fuelling this rotation.”
“First of all, there is the attractive relative valuation of cyclicals and, at the same time, we observe a strong improvement in the relative earnings momentum, ex-energy. Also, the absolute growth numbers will be better.”
Performance of All Share defensive vs cyclical sectors over 7yrs
Source: FE Analytics
According to ING Investment Management’s research, cyclical sectors are expected outpace defensive sectors by almost 6 per cent in 2015. Consumer discretionary, industrials and technology are all expected to grow their earnings by at least 10 per cent.
Becket still believes that the potential volatility of the market will be rewarding for investors, but he adds that it is important to be nimble and extremely selective.
He said: “Because of the volatility, investors should back their ideas with conviction but really have a high level of diversification.”
“Making sure your portfolios aren’t too concentrated is absolutely the way forward. The last few years have shown that markets are quite brittle and shallow.”
“If you do see volatility then I think it makes sense to have a widespread of assets and not to put all your eggs in one basket, which is certainly is the method that we are adopting at this time.”