Demand for equities expected to remain structurally weak

Strategists cited prolonged risk aversion, regulatory changes, and deteriorating demographics as factors.

HSBC’s Daniel Grosvenor, Global Equity Strategy Associate, and Garry Evan, Global Head of Equity Strategy, reported:

Investors have significantly reduced their equity allocations over the past few years. This is unsurprising given the decline in equity values and the heightened level of risk aversion since the financial crisis. However, we see little sign that investors are looking to rebalance their portfolios to pre-crisis levels, and argue that a confluence of factors could keep the demand for equities subdued for the foreseeable future.

Specifically, we believe that risk aversion is unlikely to decline soon and that aging populations in the developed world will cause a shift to safer assets (as we have already seen in Japan). In addition, a number of regulatory changes present a headwind to institutional demand. In particular, Solvency II, the new capital adequacy rules for insurers, and changes to how pensions are accounted for (IAS 19) are likely to lead to further reductions in equity holdings.

The exact impact of these trends is hard to predict, and depends significantly on the dynamics of supply. However, a clear risk is that subdued demand will cause equity risk premiums to remain high, preventing a re-rating of equities from their currently depressed levels.

We are less concerned about this impact in the emerging world. In these markets equity allocations are very low, and are likely to increase as wealth accumulates. We also find that developed investors are underinvested in EM compared to global benchmarks, and believe they will rebalance their portfolios as they realise the attractions of the emerging universe. We are currently overweight emerging markets in our global portfolio.