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Equity Allocations Rise Further, but Valuation Concerns Grow
Investors have regained confidence in the global economic outlook following resolution of the U.S. debt crisis, according to the BofA Merrill Lynch Fund Manager Survey for November. With political paralysis in Washington overcome, a net 67 percent of respondents now expect the world’s economy to strengthen over the next 12 months – up a notable 13 percentage points from October.
In an important new question for the survey, investors were asked when the U.S. Federal Reserve will begin “tapering” its bond purchases – a signal that the central bank views economic conditions as robust enough to lessen its support. Forty-eight percent see this happening next March. Eighteen percent expect it in the second quarter of 2014.
A second new question asked investors about the likeliest catalyst for the global economy reaching “escape velocity” (a virtuous cycle of growth) in 2014. The most common answer was growth in bank lending in the G7 economies (31 percent), followed by acceleration in the Chinese and Asian economies (26 percent).
Investors increased their equity allocations slightly during the month to a net 52 percent overweight, while also upping their underweight in bonds. Their biggest shift was into global emerging markets equities, where they returned to a net overweight, while strong overweights in eurozone and Japanese stocks were moderated slightly.
Strikingly, a small net majority of asset allocators now view equities as overvalued. This marked the first such reading on this measure since March 2004, but regionally, Europe is still considerably undervalued compared to the U.S. It was accompanied by cash holdings rising to 4.6 percent.
“Investors remain reluctant bulls. Who would have thought all-time highs in U.S. stock prices would coincide with high cash levels?” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “Conviction is still low in Europe. More portfolio managers expect EPS to grow, but fewer see it reaching double-digit levels,” added John Bilton, European investment strategist.
European value revealed
A net 59 percent of European fund managers expect the region’s companies to increase earnings in the next year. This is up from a net 49 percent in October. However, last month’s expectation that this hike could reach double-digit levels has evaporated. A net 9 percent now doubt that a 10 percent or better rise will be achieved.
Nonetheless, while October’s exuberance towards eurozone equities has normalized somewhat, fund managers still discern value in the market. The survey shows a net 18 percent viewing the region’s stocks as undervalued even after recent strong performance.
Korea trumps China
Global emerging markets fund managers showed a significant rise in their confidence over corporate earnings this month. A net 44 percent expect emerging markets companies to improve profits over the next year. This compares to a net 11 percent in October and September’s net 8 percent expecting earnings to decline.
Over the month, fund managers also shifted their preferences strongly between global emerging markets. Reflecting the restoration of a potential hard landing in China as the greatest tail risk globally, emerging markets specialists scaled back their overweight in the country substantially to a net 11 percent, down 45 percentage points. China replaced Russia as their top pick among the BRIC markets on a 12-month basis, however.
Much of the shift out of Chinese equities appears to have been directed into Korea. Global emerging markets fund managers ramped up their overweight on the country to a net 56 percent, up 34 percentage points.
Small is beautiful
Investors signaled a new appetite for small-cap stocks during the month. The net percentage of fund managers who expect large-caps to outperform their smaller peers fell to 7. This represented a month-on-month fall of 10 percentage points and took the reading to its lowest since the survey began asking this question.
This openness to the higher risk of less-established companies is consistent with investors’ strong conviction in the outlook for the global economy and their expectation that corporate earnings are on the rise in most regions.
Survey of Fund Managers
An overall total of 222 panelists with US$599 billion of assets under management participated in the survey from 1 November to 7 November 2013. A total of 174 managers, managing US$444 billion, participated in the global survey. A total of 111 managers, managing US$280 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.
BofA Merrill Lynch Global Research
The BofA Merrill Lynch Global Research franchise covers nearly 3,500 stocks and over 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-America survey; No. 2 in the All-Japan survey for the second consecutive year; No. 2 in the 2013 All-Latin America survey; No. 2 in the 2012 All-China survey; and No. 3 in the 2013 Institutional Investor All-Europe survey. The group was also named No. 2 in the 2013 Institutional Investor All-America Fixed Income survey for the second consecutive year; and No. 3 in the 2013 All-Europe Fixed Income Research survey.
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