Record Move Out of Energy Stocks in Wake of Gulf Spill
Investors’ belief in global economic growth and the ability of corporations to improve profits has significantly eroded, according to the BofA Merrill Lynch Survey of Fund Managers for June.
The survey, conducted as global equities fell by 7.5 percent, shows only a net 24 percent of respondents believing the world economy will strengthen in the next 12 months, down from 42 percent in May and 61 percent in April. Global investors have expressed similar concerns over corporate profits. A net 28 percent of the panel believes that profits will improve in the coming 12 months, compared with 47 percent in May and 67 percent two months ago. The proportion of the panel expecting corporate operating margins to improve in the coming year has halved in the past two months to a net 19 percent.
Investors are displaying greater concern about market liquidity conditions with 42 percent of the panel describing liquidity as “poorâ€, up from 22 percent in April. Broadly, however, risk appetite remains steady. Average cash balances fell slightly to 4.1 percent of the portfolio from 4.3 percent in May.
Inflation fears are plummeting and as a result 80 percent of respondents have ruled out a Fed rate rise in 2010. The survey also hints that investors can see buying opportunities beckoning with a net 38 percent of the panel saying equities are undervalued, the highest reading since March 2009.
“Global growth expectations have ‘double-dipped’ and positioning is more defensive but investors show little sign of panic,†said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Global Research. “Investors are starting to see the basis for Europe’s rehabilitation on the back of a more constructive outlook for the euro,†said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.“
Global investors ready for Europe’s redemption
Negative sentiment from global investors towards Europe, at its worst in May’s survey, appears to have troughed. Global investors are feeling more hopeful about the outlook for Europe’s stocks and for the euro. June’s survey shows 19 percent of the global panel is predicting the euro to appreciate over the coming year, up from 7 percent in May. Meanwhile investors’ love-affair with the US dollar has cooled. Investors are neutral about the dollar’s value, a month after a net 29 percent had viewed it as undervalued.
A month ago a net 30 percent of the panel identified the eurozone as the region they would most like to underweight. That figure has fallen sharply to just 12 percent. The proportion of the panel pinpointing the eurozone as having the weakest outlook for corporate profits has fallen to 33 percent from 41 percent in May. The proportion of global investors underweight eurozone equities has fallen to a net 27 percent from 34 percent a month ago.
In contrast, investors within the region at their gloomiest in more than a year. Only a net 7 percent of European fund managers expect the region’s economy to improve in the coming year, compared with a net 23 percent in May, according to the regional survey. A net 20 percent of European portfolio managers predict an improvement in earnings over the coming 12 months, down sharply from 74 percent in April.
Confidence in China has fallen to its lowest level since January 2009. A net 27 percent of fund managers expect China’s economy to weaken in the coming 12 months, a big turnaround from April when a net 21 percent predicted the economy to improve. Commodities, closely correlated with China’s fortunes, have suffered. Only a net 4 percent of global investors remain overweight the asset class, down from 17 percent a month ago.
Energy stocks hit hard; investors search for income
Investors have sold down energy stocks in record numbers amid news of the continuing oil spill in the Gulf of Mexico. Just a net 7 percent of global asset allocators retain an overweight position on the sector, down from a net 37 percent in May, the biggest monthly swing in energy the survey has recorded.
Broadly, investors have tightened their defensive approach towards equities, moving out of cyclical sectors. Asset allocators are now underweight Materials, holding their lowest allocations since March 2009.
Secure-dividend sectors such as Staples are benefiting. A net 15 percent of the panel is overweight Staples, up from 4 percent in May and at its highest since March 2009. Staples have replaced Energy as the second most-favoured sector after technology. Allocations towards Utilities and Pharmaceuticals have also risen.
More
