Investors expressing preference for corporate over sovereign risk
Investors have recovered their bullishness towards equity markets but are shifting their focus away from Europe and into the US and Japan, according to the BofA Merrill Lynch Survey of Fund Managers for March.
After weakened sentiment in February, investors have restored their faith in equities with a net 46 percent of asset allocators saying they are overweight the asset class, up from 33 percent the previous month. Cash positions have fallen with respondents at a net neutral cash allocation compared with a net 12 percent underweight in February.
Asset allocators have retrenched from Europe, however. A net 21 percent are underweight European equities this month, up sharply from a net 2 percent overweight in January. The change in favor of US equities has been similar. A net 19 percent of asset allocators are overweight US equities this month, up from just 1 percent in January. Japan is also regaining popularity. A net 6 percent of allocators are overweight Japanese equities, the most bullish reading since August 2007, and up from a net 10 percent underweight in January.
Global investors believe that the corporate outlook is better away from Europe. A net 40 percent of the panel says the outlook for eurozone corporate profits is the least favourable of all regions.
“Investors’ concerns about Greece are easing but European country risk remains a key constraint to optimism over economic recovery,†said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Research. “Investors are more willing to embrace corporate risk, via equities, than sovereign risk,†said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Research.
Corporate outlook good, macro-economic outlook bad
Against a backdrop of concerns over public sector deficits investors are showing greater bearishness about the macro economic outlook – but greater bullishness about companies.
The net number of European fund managers predicting growth in their own economy over the coming 12 months has fallen to 45 percent, down from 72 percent in January, according to the Regional Fund Manager Survey. While European sentiment might have been expected to weaken, a similar fall in optimism is also evident among US investors. A net 43 percent forecast growth in the American economy over the next 12 months, down from a net 76 percent in January.
Investors in both regions have stronger belief in earnings growth. A net 60 percent of European respondents predict improved earnings in the coming 12 months, an increase of 11 percent on February. Their colleagues in the US are more positive with a net 72 percent forecasting earnings growth, up from a net 52 percent in February.
US and European investors have significantly scaled back their cash allocations. A net 9 percent of the European panel is overweight cash this month, down from 26 percent in February. The corresponding numbers for US investors are a net 8 percent in March and 19 percent in February.
European respondents have increased exposure to cyclical sectors, including Basic Resources and Construction. They have reduced their underweight position on banks. US investors have also increased exposure to cyclicals, such as Industrials and Materials, but have extended their underweight positions in Banks.
Inflation concerns and rate hike expectations put on ice
Inflation expectations have fallen further and investors are seeing rate hikes as less likely. The net percentage of the global panel expecting inflation to increase in the next year has fallen to 34 percent from 46 percent in February and 61 percent in January.
European investors have sharply scaled back their expectations of a rate hike by the European Central Bank (ECB) before October 2010. Eighty-five percent of European respondents are ruling out a hike before the fourth quarter, up from only 45 percent in February.
The global panel views change in monetary policy as less of a threat to macro-economic stability. Less than half of respondents (48 percent) describe monetary policy as an “above normal†risk, compared with 55 percent in February. A net 58 percent of global investors expect long-term interest rates to increase, compared with a net 65 percent in February.
Survey of Fund Managers
A total of 207 fund managers, managing a total of US$589 billion, participated in the global survey from 5 March to 11 March. A total of 165 managers, managing US$403 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS. Through its international network in more than 50 countries, TNS provides market information services in over 80 countries to national and multi-national organizations. It is ranked as the fourth-largest market information group in the world.
The BofA Merrill Lynch Global Research franchise covers nearly 3,000 stocks globally and ranks in the top tier in many external surveys. Most recently, the group was ranked No. 1 in the 2010 Institutional Investor All-Emerging Europe Research team survey and No.3 in the 2010 Institutional Investor All-Europe team survey for pan-European coverage. In addition, the group was named 2009 Top Global Broker, Top U.S. Broker and No. 2 Europe Broker by Financial Times/StarMine and 2009 Best Brokerage by Forbes/Zacks; No. 2 in the 2009 Institutional Investor 2009 All-Brazil Research team survey; and No. 3 in the 2009 Institutional Investor 2009 All-America Equity, All-Latin America and All-America Fixed-Income Research team surveys.
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