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Risk appetite up for second month running, with expectations of
near-term returns at survey high
Sentiment buoyed by fundamentals, earnings and improving policy
and macro outlooks
Financials see strongest favor, but tech sees biggest outlook
upgrade
US equity investor risk appetite improved for a second month
running in November, rising to the highest since April.
Expectations of near-term returns meanwhile hit a new high, fueled
by improved prospects for earnings, equity fundamentals and
shareholder returns, as well as brighter outlooks for macro and
policy factors.
The Risk Appetite Index from IHS Markit's Investment Manager
Index™ (IMI™) monthly survey, which is based on data from around
100 institutional investors each month, rose from +7% in October to
+36% in November, its highest since the survey peak of +54% seen
back in April 2021. As such, the survey indicates a substantial
improvement from the near-evaporation of risk appetite recorded
back in September.
The swelling of risk appetite was accompanied by a marked uplift
in investors' expectations of market returns over the coming month
to a survey high, surpassing the prior (April) peak by a wide
margin and building further on the improvement seen in October.
By comparison, the survey's Expected Returns Index had fallen to
-12% in September, which preceded the brief market fall, before
rising again to signal to a marked turnaround in sentiment which
has gathered momentum over the past two months. The index has now
risen to +38%.
The biggest drivers of the market in the near-term are
considered to be equity fundamentals and shareholder returns, the
former viewed as the most supportive since August and the latter
seen as more supportive than at any time over the 14-month survey
history.
However, November also saw investors' expectations of market
support from both central bank and fiscal policy lift higher,
having sunk in both cases to survey lows in October. Similarly, the
macro environment is also seen as more positive for equities than
viewed in October, with both the US and global economies set to
provide the biggest contributions to returns since July, coinciding
in particular with signs of the COVID-19 Delta wave easing.
With the S&P 500 reaching new highs, valuations against
historical levels meanwhile remain by far the largest perceived
anchor on the market, and is the only factor not to see an
improving trend in November.
The political environment is again perceived as a net drag on
returns, albeit slightly less so than in October, reflecting
concerns over domestic budget spending as well as broader
geopolitical issues and China's tech regulation.
In terms of sector preferences, financials have retained the
most-favored spot in November for a third successive month having
seen the biggest positive shift in sentiment over the past year,
followed by healthcare. However, it was tech stocks that enjoyed
the largest upswing in favorability compared to October, with
sentiment rising to the highest since February.
Economy hopes meanwhile lifted sentiment towards consumer
discretionary, industrial and basic materials, though in some cases
inflation and supply line worries continued to constrain appetite.
Utilities, real estate and consumer staples are seeing ongoing
bearish sentiment.
Upwardly revised earnings estimates
These improving factors coincide with a strong Q3 earnings
season which has led investors to revise up their expectations of
Q4 earnings on average.
The Q3 results so far have prompted 32% of investors to ramp up
their expectations of Q4 earnings, according to the latest IMI
poll, outnumbering the 10% that have revised down their
expectations by three-to-one.
The net upward revision of +22% is lower than the reading of
+30% seen back in August, but nevertheless is a strongly positive
reading.
The overall net upward revision to Q4 earnings estimates tallies
with the substantial jump in risk appetite recorded by the November
IMI survey and coincides with equity fundamentals being the
strongest expected driver for near-term market returns in the
latest poll.
Commenting on the survey, Chris Williamson, Executive Director
at IHS Markit and report author, said:
"A strong Q3 earnings season has coincided with brighter
economic prospects and reduced concerns over COVID-19 as the Delta
wave eases, propelling risk appetite higher in November. While
central bank policy, fiscal policy and the macro environment are
viewed as far less supportive of the market than earlier in the
year, November has seen investors become less concerned, with
expectations of near-term equity market returns spiking higher and
Q4 earnings estimates revised higher."
Also commenting on how the survey results compare to trade
settlement data, Kevin Roy, VP of IHS Markit's Global Issuer
Solutions, said:
"We continue to see a significant correlation between the IMI
survey results and the $21T in equity trading settlement data we
track on a weekly basis. The positive sentiment upswing for tech
has been led by hedge funds which reversed course and aggressively
increased exposure after two consecutive weeks of selling.
Meanwhile, healthcare stocks have benefited from both institutional
and ETF inflows despite profit-taking by hedge funds."
Also commenting on the survey results, Thomas Matheson, head of
dividend forecasting at IHS Markit, said:
"Shareholder returns are of increasing importance going into Q4
and investors expect to be rewarded with growing dividends and
buybacks. As COVID-19 fears wane, rising inflation and labor costs
are now the key risks to capital allocation priorities, however we
expect dividends will prove to be just as persistent as any other
cost and see S&P 500 dividends approaching double-digit growth
in 2022."
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.