BANK OF AMERICA
“Great Rotation” Into Equities From Fixed Income Gains Ground
Global investors have become significantly more confident in the outlook for growth, according to the BofA Merrill Lynch Fund Manager Survey for August. A net 72 percent of respondents now expect the world’s economy to pick up over the next 12 months – the survey’s strongest reading on this measure in nearly four years and a striking rise from July’s net 52 percent.
Investors remain concerned over a “hard landing” in China, though this has calmed since last month. More than half of the panel still identifies this threat as the biggest risk for markets and economies. However, a net 32 percent of investors expect China economic growth to be weaker, improvement from net 65 percent expecting the same last month.
At the same time, sentiment towards the eurozone has improved notably. No fewer than 88 percent of European fund managers now anticipate the region strengthening in the year ahead, twice the level recorded last month. Respondents increasingly view stronger growth as the likeliest solution to the eurozone debt crisis, rather than interventions by the European Central Bank.
The macroeconomic tailwind is reflected in a further overweighting of equities, to a net 56 percent. Equally, the higher inflation and long-term interest rates expectations led to an increase in underweight in bonds (to a net 57 percent). Cash holdings are reduced slightly from July’s year-high level, but remain at an elevated 4.5 percent. This appears to tie in with the widespread expectation among investors (seven out of eight) that recovery will remain below-trend for the time being.
“While global growth expectations have risen very rapidly, the good news is that cash levels remain high. Out-of-favor emerging markets offer some enticing opportunities to deploy these balances,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
“The current earnings season shows global recovery reflected in European companies’ performance. With the eurozone the most undervalued major market by far, optimism on the region’s equities should be sustained,” added John Bilton, European investment strategist.
With macroeconomic views of the eurozone increasingly positive, investors are positioning for gains in the region’s equities. A net 20 percent of respondents would overweight the market on a 12-month view – this marks the survey’s highest reading on this measure in over six years and makes the region investors’ top choice on this horizon, ahead of Japan. Already, a net 17 percent reports being overweight currently, a 14 percentage point rise since last month.
Sentiment would improve further if a European banking union were implemented, the survey makes clear. This remains the key factor for a full revival of European risk appetite, according to panelists, though they also look for structural reforms in peripheral economies and evidence of strong corporate earnings.
GEM sentiment still sour
Investors’ weak conviction towards global emerging markets (GEM) is evident from their reported net 19 percent underweight in GEM equities. This further weakening compared to last month represents the lowest level recorded in the survey in nearly two years, even though more than three-quarters of specialist fund managers view GEM equities as undervalued.
Nonetheless, some positive GEM stories stand out from the survey. In particular, Korea (broadly referring to South Korea's Kospi Index) has seen a notable turnaround in sentiment since last month. GEM specialists now rank the market one of their top picks (alongside China and Russia), from a net 21 percent underweight in July.
Call for more capex
Given the strength of the macroeconomic outlook, companies should be committing more resources to capital expenditures that could secure and even enhance their future growth, in investors’ view. A net 64 percent of panelists believe that corporates are under-investing in their businesses, up a further six percentage points from July’s strong reading.
Investors’ call for more aggressive capex reflects doubts over the strength of future corporate earnings. The survey reveals improved profit expectations, with a net 43 percent of global fund managers looking for better EPS in the next year - the measure’s highest level since early 2011.
But only a minority (32 percent) judges that the global corporate universe is likely to achieve double-digit EPS over the period.
Survey of Fund Managers
An overall total of 229 panelists with US$671 billion of assets under management participated in the survey from 2 August to 8 August. A total of 180 managers, managing US$516 billion, participated in the global survey. A total of 112 managers, managing US$290 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Global 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.
BofA Merrill Lynch Global Research
The BofA Merrill Lynch Global Research franchise covers over 3,500 stocks and nearly 1,100 credits globally and ranks in the top tier in many external surveys. Most recently, the group was named Top Global Research Firm of 2012 by Institutional Investor magazine; No. 1 in the 2013 Institutional Investor All-Asia survey for the third consecutive year; No. 1 in the Institutional Investor 2013 Emerging Market & Fixed Income Survey; No. 2 in the 2013 Institutional Investor All-Japan survey for the second consecutive year and No. 2 in the 2012 All-China and All-Latin America surveys; No. 3 in the 2013 Institutional Investor All-Europe survey and No. 3 in the 2012 Institutional Investor All-America survey. The group was also named No. 2 in the 2012 Institutional Investor All-America Fixed Income survey; and No. 3 in the 2013 All-Europe Fixed Income Research survey.
Additionally, BofA Merrill Lynch Global Research was named the No. 1 Global Broker by Financial Times/StarMine, as well as ranked No. 1 in the U.S. and Europe and No. 2 in Asia. The group was also named No. 1 in Asia and No. 2 in the U.S. in the Wall Street Journal Best on the Street 2012 Analysts Surveys.
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