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BofA Merrill Lynch Fund Manager Survey Finds Investors Raising Cash While Cutting Commodity Allocations

Improved Growth Outlook Supports Keeping Faith With Equities

Tuesday, December 16, 2014 8:30 am EST

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"The prospect of ECB QE has brought growing consensus on European equities, but the weakening business cycle and falling commodity prices are working against true earnings recovery"

Global investors are keeping faith with equities while raising cash as markets enter the volatile year-end period, according to the BofA Merrill Lynch Fund Manager Survey for December.

Asset allocators have hiked their cash holdings to an average 5 percent. Moreover, a net 28 percent are now overweight relative to their benchmarks. This is the survey’s highest reading on this measure since June 2012.

Despite this defensive move, respondents show renewed confidence in the global economy. A net 60 percent now expect it to strengthen over the next year – up almost 30 percentage points in two months. Against this constructive background, they are also more confident that corporate earnings will rise.

At the same time, inflation expectations have fallen to their lowest level since August 2012.

Commodities are a significant factor in this. A net 36 percent of fund managers view oil as undervalued following its recent price fall. This reading is up over 20 percentage points since October and represents its lowest level since 2009.

In addition, expectations of European economic performance have improved. This reflects the likelihood of the European Central Bank beginning a program of quantitative easing next quarter – as 63 percent of respondents now expect, compared to November’s 41 percent. This translates into higher appetite for eurozone equities, notably banks, revealed in the survey.

“We are seeing capitulation out of energy and materials to the benefit of the dollar, cash, eurozone stocks and global tech and discretionary stocks,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research. “The prospect of ECB QE has brought growing consensus on European equities, but the weakening business cycle and falling commodity prices are working against true earnings recovery,” said Manish Kabra, European equity and quantitative strategist.

Benign inflation ups growth expectations

A growing number of investors now anticipate a favorable scenario of above-trend growth and below-trend inflation over the next 12 months. While this is still a minority view (with the majority anticipating that both growth and inflation remain below-trend), its reading has jumped five percentage points month-on-month.

A net 20 percent now expect higher global consumer prices in the next 12 months. This is down from last month’s net 35 percent.

In this environment, respondents view global fiscal policy as too restrictive. This month’s net 26 percent is the survey’s highest reading on this measure since July 2012.

Commodity collapse

Commodities have fallen sharply out of favor. A net 26 percent of fund managers are now underweight the asset class. This is up from November’s net 18 percent and marks the survey’s lowest reading on this measure in a year.

This shift is also evident in strong moves in investors’ positioning. Both the energy and materials sectors saw 19 percentage-point month-on-month increases in net underweights.

Commodities’ fall has intensified bullishness on the U.S. dollar. While funds continue to view long exposure to the U.S. currency as the most crowded trade in financial markets currently, they still regard the dollar as significantly undervalued.

Europe finds favor

Appetite for eurozone equities has risen to a net 26 percent overweight, up from November’s net 8 percent. Intentions to own the market have also risen, with Europe now the region fund managers are most likely to overweight over the next year.

A net 19 percent regard eurozone equities as undervalued. This reading is up from November’s net 12 percent.

Regional fund managers have raised their exposure to European banks in particular. A net 13 percent are now overweighting the sector, compared to last month’s net 3 percent underweight.

In contrast, investors have less conviction towards U.S. and Japanese stocks. With the U.S. market appearing overvalued to a strong majority of the panel, a net 10 percent now intend to underweight it in the coming 12 months.

Fund Manager Survey
An overall total of 214 panelists with US$604 billion of assets under management participated in the survey from 5 December to 11 December 2014. A total of 165 managers, managing US$446 billion, participated in the global survey. A total of 99 managers, managing US$264 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 nearly 3,400 stocks and 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 2013 by Institutional Investor magazine; No. 1 in the 2014 Institutional Investor All-Europe survey; No. 1 in the 2014 Institutional Investor All-Asia survey for the fourth consecutive year; No. 1 in the Institutional Investor 2014 Emerging EMEA Survey; No. 2 in the 2014 Institutional Investor All-America survey; and No. 2 in the 2014 All-China survey. The group was also named No. 2 in the 2014 Institutional Investor All-Europe Fixed Income Research survey; and No. 2 in the 2014 All-America Fixed Income survey for the third consecutive year.

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