Friday, January 15, 2010

Institutional Investor Survey

A couple of days I posted Bob Farrell's Rules for Investing Success. Number 9 on that list stated that "when all the experts and forecasts agree - something else is going to happen".

With that in mind, I was a little concerned to read this survey this morning. Taken by the brokerage firm Sanford Bernstein, it paints a picture of an investment community that is pretty convinced that the market is undervalued, and that 2010 is shaping up to be another good year for stocks.

Equity Portfolio Strategy: What Do You Think? Our Q1 2010 Investor Sentiment Survey


Earlier this week we sent out a survey to institutional investors addressing several important issues regarding the 2010 outlook. We have tallied the views on valuation, the earnings outlook, and interest rate expectations.

• Survey response demographics: Of the 175 respondents, 58% were from long-only firms and 62% were generalists

• Investors think large cap quality will outperform in 2010, but views are more mixed on style and geography: Our investor survey points toward risk aversion as 87% of respondents think "quality" will outperform "junk" in 2010. The majority of investors (77%) think large caps will outperform small caps,with more balanced views on style (61% growth, 39% value) and geography (61% think foreign stocks
will outperform the US market).

• Is the market cheap? 74% of investors consider the market to be undervalued or within 5% of fair value. Only 26% think the market is overvalued, and only 10% think it is overvalued by more than 15%. Despite the moderately bullish outlook on market levels, investors are less comfortable with consensus S&P 500 earnings projections which embed 24% year-over-year growth in 2010E. In fact,only 18% think the estimates are too low while 43% expect downward revisions.

• Expectations are for a weaker dollar and a Fed tightening in Q3 2010 to Q1 2011: Expectations of the dollar strengthening (60% of respondents) likely represents a vote against the risk trade and is not a reflection of underlying economic fundamentals improving. Investors expect the Fed to be patient in the coming six months, with 79% of respondents expecting the Fed to begin tightening between
Q3 2010 and Q1 of 2011. Only 2% of respondents expect a Fed move this quarter.

• Inconsistent responses? We examined style preferences given certain economic assumptions. We uncovered a number of potential inconsistencies in the survey responses.

− Quality is preferred over junk even for those with more bullish expectations on valuation, earnings,employment and housing. Among investors who favored quality were: 78%of the respondents who felt the market was undervalued, 78% of those who believed EPS expectations were too low and 81% of those expecting both housing and employment surprises. A contrarian posture against such strong sentiment may warrant balancing quality exposure with junk. In other words, a greater exposure to junk than our prior bias may be appropriate.

• Sector preferences for 2010: Finally, our survey asked investors to rank the major sectors from most overvalued to most under-valued. Commodities and consumer cyclicals were cited most as overvalued while utilities, telecom and healthcare products and healthcare services are "loved" sectors for 2010.