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SCMP Reporter

STAMPEDING North American retail investors are causing asset allocators in London to worry when this Wall Street bubble will pop. A wall of money hit United States domestic equity mutual funds in January and December, spiking at US$50 billion over the two months.

   Global asset allocators at SBC Warburg in London point out this inflow is unprecedented. And it probably can not go on.

  The broker warns the second quarter is going to be a pretty fierce test of the US retail investor's mettle as conditions are emerging which signal a big swing in money flows might be on the way.

  Worrying trends lie behind the retail investor frenzy. Speculation is on the increase. Flows into aggressive growth funds as a percentage of equity inflows have averaged 26 per cent over the past 12 months, against a historic average of 16 per cent.

  As the profit fever has gripped more and more investors in an infectious tide of greed, income and high yields have totally lost out. Cash levels are at record low levels. SBC Warburg says this is probably unsustainable.

  The mutual fund industry now has higher weighting in equities than at any point since 1982. Exposure to bonds and money market funds has fallen to a low of 44.9 per cent of assets.

  Although structural changes to personal capital are going on in the US with the introduction of the tax efficient 401K's and ESOP's, these agents of change do not fully explain away these massive flows of cash. Equity holdings of households as a percentage of discretionary assets in the US is now back to levels not seen since the 1960s.

  Retail mutual unit-holders are not the only breed of investor cattle herding into equities.

  Public and private pension companies have their highest exposure to equities since the 1980s. The average equity holding in public pension funds is 48.5 per cent and in private portfolios it is 53 per cent. These levels should be regarded as maximum weightings, leaving little or no room for further increases in equity exposure.

  SBC is concerned as the combined assets of public and private pensions funds stands at $1.8 trillion, so even a small wobble in sentiment or correction in equity weightings will have a significant impact on stocks.

  Foreigners also are a potential problem, the brokerage says. British fund managers have completely missed the boat in the great North American stock market surge. They have even been selling into the rally. Their holdings now rank at 18 per cent of portfolio compared to a global asset weighting by market capitalisation of 44.7 per cent.

  As the pain of being left out gets worse, fund managers might change their minds on Wall Street.

  In a bid to catch up with this soar-away market, foreigners are probably going to add to the Wall Street bubble.

  A sign that the bubble is about to burst is foreign investor activity. 'Unfortunately we do have to admit that the foreigner has been the classic counter-cyclical signal,' SBC says. In 1987 and 1990 foreigners were big swinging Richards in North American stocks, with strong net buying in the six months ahead of each crash.

  Investors need to be wary of conditions that are conducive to stalling this kind of money flow.

  Interest rates can burst bubbles. Other bubbles have required both a rise in short and long rates in three and one months prior to bursting. The brokerage warns three-month rates can rise even with the Fed funds rate being cut by 25 basis points.

  Four out of five bubbles in the past have required a loss in month-on-month momentum.

  Another period of vulnerability for stock markets, with or without bubble conditions, is the two weeks before a results reporting season.

  SBC warns a rise in short and long-term rates, a loss of buying momentum and wobbles in sentiment caused by corporate earnings surprises are all possible, or even likely, in April.

  If the bubble does burst, markets around the globe need to watch out. If Wall Street is falling, mutual fund investors are unlikely to increase holdings in more 'risky' overseas markets. They probably will be keen to cull outside holdings.

   So a highly liquid market like Hong Kong is directly in the line of fire should the Wall Street bubble burst because of the territory's powerful link to US interest rates through the currency peg.



Beware the pop from the weasels of Wall St