Signs That Great Rotation out of Bonds Into Equities Is Starting
Confidence in the outlook for China’s economy has surged to a three-year high, underpinning broader optimism about the global economy and equity markets, according to the BofA Merrill Lynch Fund Manager Survey for November.
A net 51 percent of investors polled in across Asia Pacific, Global Emerging Markets and Japan believe that China’s economy will strengthen in the coming year, the highest reading since July 2009. The monthly upswing of 46 percentage points, from a net 5 percent in October, represents the largest single-month increase since February 2009.
The survey suggests that optimism in the global economy is outweighing fears surrounding the U.S. fiscal cliff. A net 34 percent of the panel believes the world economy will strengthen in the next 12 months, the highest level since February 2011 and a monthly rise of 14 percentage points. A growing number of investors view the U.S. fiscal cliff as the biggest tail risk – 54 percent of the panel this month, up from 42 percent in October.
Corporate profit expectations rose significantly for the second successive month. A net 4 percent of investors believe the outlook for profits will improve in the coming 12 months. This compares with net 28 percent predicting a worsening in corporate profits two months ago. Equity allocations are rising, and 42 percent of the panel says they will opt to sell government bonds to make way for higher beta equities, up from 37 percent in October. Reducing cash levels is the second preference.
“Momentum has gathered behind the idea that we are on the cusp of a ‘great rotation’ out of bonds and into equities. The only missing ingredient is a resolution to the U.S. fiscal cliff,” Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research said. “While sentiment within Europe remains weak, rising allocations to global stocks tell us confidence in general is improving. The jump in China optimism shows how fast sentiment can turn around,” said John Bilton, European investment strategist.
Early signs that great rotation is underway
November’s survey suggests that the great rotation out of bonds into equities could be underway. Asset allocators have, for the fifth successive month, increased allocation to equities while reducing bond positions. A net 35 percent are overweight equities, compared with a net 25 percent in October. A net 35 percent of asset allocators are underweight bonds, up from a net 26 percent a month ago. More investors are expecting higher interest rates as inflation expectations inch upwards.
Little sign of risk taking is apparent in asset classes other than equities. Allocations to commodities are down this month, allocations to real estate are unchanged while the proportion of allocators overweight alternative assets ticked upwards by a two percentage points to a net 9 percent.
Emerging market appetite rises
Investors and asset allocators are showing appetite for a greater exposure to emerging markets. A net 37 percent of allocators are overweight Global Emerging Market equities, up from a net 32 percent in October. A net 30 percent of investors say that Global Emerging Markets is the region that they would most like to overweight in the coming year – up from a net 22 percent last month.
Shifts in sector allocations reflected a growing appetite for equities with exposure to emerging markets, especially China. A net 13 percent of global investors are overweight Industrials this month, a rise of 6 percentage points since October. The proportion of European investors overweight Automotives & Parts and Basic Resources rose by a net 11 and 21 percentage points respectively.
Sentiment split over Japan between domestic and global investors
While domestic investors are increasingly hopeful about Japan’s prospects, global investors remain cautious. A net 18 percent of Japanese investors expect the economy to strengthen in the coming year, compared with a net 30 percent forecasting deterioration in October. The panel is now neutral on the outlook for profits in the year ahead. Last month, a net 22 percent forecast worsening earnings.
Global investors are far from convinced that Japan’s outlook is improving. Asset allocators have moderately scaled back underweight positions in Japanese equities. A net 34 percent are underweight the region this month, down from a net 38 percent in October, but still a historically bearish position.
Bearishness over the yen has risen. A net 39 percent expect the yen to depreciate more against other major currencies in the coming 12 months, an increase from a net 23 percent last month.
Fund Manager Survey
An overall total of 248 panelists with US$695 billion of assets under management participated in the survey from November 2 to November 8. A total of 186 managers, managing US$568 billion, participated in the global survey. A total of 133 managers, managing US$278 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.
