Allocations to European Equities Hit Six-year High
Investor bullishness towards European equities has reached pre-crisis highs as markets digest the emerging markets sell-off, according to the BofA Merrill Lynch Fund Manager Survey for September.
Allocations to eurozone equities have reached their highest level since May 2007. A net 36 percent of global asset allocators are overweight the region, more than twice the net 17 percent recorded in August. A net 12 percent of asset allocators are overweight U.K. equities, which represents an all-time high. Allocations to emerging market equities remain low with a net 18 percent of the panel underweight.
Investors have signaled their intent to maintain flows into Europe. A net 27 of investors say that the eurozone is the region they would most like to overweight in the coming 12 months – also the highest reading since May 2007. The switch in sentiment towards Europe has been swift. Only a net 2 percent expressed a desire to overweight the region in July. Greater confidence in Europe’s economy is evident. Half of the panel believes that stronger EU growth is the most likely solution to the region’s debt crisis – versus only 19 percent who believe that ECB-led stimulus is the key solution. In July, only 30 percent believed Europe could grow its economy out of crisis.
While optimism is returning to Europe, cash levels have risen to an average of 4.6 percent of portfolios. The proportion of asset allocators overweight cash has risen. Eight out of 10 investors believe the global economy will continue to grow at below trend rate in the coming 12 months.
“Investor cash levels remain high because the fear of bond markets is greater than the appetite in equity markets,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “Belief in Europe’s economy is robust and though eurozone equities have come back strongly, value remains the best on offer in developed world markets,” said John Bilton, European investment strategist.
Surge in China optimism hints at brighter outlook for emerging markets
A spike in optimism towards China’s economy is one sign that emerging markets could be set to recover in the months ahead. A net 28 percent of respondents from Japan, Asia Pacific Rim and global emerging markets believe China’s economy will strengthen in the year ahead. That’s in sharp contrast with the net 32 percent forecasting a weakening economy just one month ago – a monthly swing of 60 percentage points.
Negative sentiment towards global emerging markets has stabilized. The number of investors saying that emerging markets is the region they most want to underweight has fallen to a net 21 percent in September from a net 29 percent a month ago.
Investors are indicating that they see the best value in emerging markets in almost a decade. A net 36 percent of the panel says that global emerging market equities are the most undervalued – or cheapest – of all the regions. This is the strongest undervalued reading since January 2004. Asset allocators, meanwhile, have been steadily decreasing the underweight positions in commodities since June. A net 16 percent of the panel is underweight this month versus a net 26 percent in July.
Demand for capital investment at highest since 2005
Respondents to the Fund Manager Survey are sending a powerful message to companies that they should prioritize capital expenditure (capex) over other uses of cash. More than half of the panel – 54 percent – says that increasing capital spending should be the top use of cash flow, up from 45 percent in July and the highest reading since December 2005.
In contrast, only 11 percent believes that improving balance sheets should be a priority. A growing number of respondents would like to see companies borrow more. A net 42 percent says companies are under leveraged, compared with a net 35 percent two months ago. Significantly, the survey shows less demand for companies to return cash to shareholders. The proportion of the panel asking companies to prioritize buy backs and dividends has fallen from 37 percent in July to 28 percent in September.
Great rotation from bonds in evidence
September’s Fund Manager Survey shows how the great rotation from bonds to equities has progressed. The gulf between allocations towards equities and bonds is at its widest since February 2011, and the second-widest in the history of the survey. A net 68 percent of asset allocators are underweight bonds, the greatest underweight position recorded since April 2006 – to give a bond to equity allocation spread of 128 net percentage points.
Survey of Fund Managers
An overall total of 236 panelists with US$689 billion of assets under management participated in the survey from 6 September to 12 September 2013. A total of 172 managers, managing US$518 billion, participated in the global survey. A total of 123 managers, managing US$272 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.
