As the Russell 2000 Index fell by more than 10% in August, including a 13% drop from 13 to 18 August, the outlook for US small caps is pitch-black, according to the latest EIE Fund Manager Sentiment Survey. Asset managers deem losses on their investments in the asset class even more likely than government bonds producing negative returns in the following 12 months. US large caps are slightly less unpopular, with two fund companies even expecting the asset class to deliver positive returns.
“If the debt to GDP ratio increases rapidly, it’s often a sign people are taking on more credit than they can afford” - Chris Jeffery
While faith in European equities is seemingly unscathed despite last week’s violent market movements, return expectations for emerging market equities are at their lowest since the first quarter of 2014. Even though both global EM and Asia ex-Japan equities have underperformed developed equities for the past three years, asset managers remain sceptical about the returns local stock markets can deliver in the short term.
EM debt surge: a mounting problem
As emerging market economies have become more reliant on consumption to drive economic growth, this shift has been accompanied by a surge in private debt. “A high level of private debt as such is not necessarily a problem, but if the debt to GDP ratio increases rapidly, it’s often a sign people are taking on more credit than they can afford,” says Chris Jeffery, an asset allocation strategist at LGIM, one of the asset management companies with a bearish outlook on EM equities.
