BofA Merrill Lynch Fund Manager Survey Finds Investors Exuberantly Bullish on Europe After Promise of ECB Action
Weakening Expectations in China Limit Impact on Global Growth Outlook
Global investors are significantly more positive on the outlook for Europe after the European Central Bank’s announcement of quantitative easing to reflate the region’s economy, according to the BofA Merrill Lynch Fund Manager Survey for February.
Europe’s profit outlook is at its best since 2009, according to panel members. A net 81 percent of regional specialists see the economy strengthening in the next year. Against this background, a record net 51 percent make the region their top pick in equities over a one-year horizon, up from January’s net 18 percent. A net 55 percent are already overweight.
The U.S. has been the main loser from this rotation. Overweights on U.S. equities have declined to a net 6 percent, down 18 points versus last month.
Overall, fund managers have increased their allocations both to stocks (a net 57 percent overweight, up six points month-on-month) and cash (a net 22 percent overweight, a five-point rise). This is at the expense of bonds, which are now seen as overvalued by a net 79 percent. Bonds are also perceived as the asset class most vulnerable to increased volatility this year.
Despite exuberance over Europe, the global growth outlook is little changed. This reflects declining expectations on China. A net 58 percent of respondents now expect that country’s economy to weaken over the next 12 months, the survey’s lowest reading on this measure in nearly two years.
“The ECB has successfully vanquished global deflation fears and induced the return of reflation trades in February,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research. “Sentiment has gotten ahead of the fundamentals on European equities. It is as if there is not a single bear left. We will need to see a strong recovery very soon to keep the bulls happy,” said Manish Kabra, European equity and quantitative strategist.
Investors’ new bullishness on Europe is strongly focused on the Eurozone. Non-Euro markets are out of favor. Last month, France and Italy stood out as their worst picks, but a net 42 percent of regional fund managers now intend to underweight the U.K. and Switzerland this year. They have also shifted to a negative stance on Sweden.
Autos are now European regional investors’ favored sector. A net 26 percent are overweight, a month-on-month gain of 12 percentage points. The travel and leisure area has also gained support with a 10-point rise.
In contrast, banks and insurers saw notable declines in sentiment. Month-on-month falls of 32 and 20 percentage points, respectively, have taken both into underweight territory. Utilities are now the region’s least favored sector.
Anxiety over potential Eurozone deflation has declined with the ECB’s QE announcement. Indeed, inflation expectations are picking up. A net 29 percent of fund managers expect global core CPI to be higher in a year’s time, up from a net 14 percent a month ago.
A potential geopolitical crisis is now clearly respondents’ major tail risk. One in three identifies it as their major concern.
Gold glisters again
China’s weakening outlook is weighing on Global Emerging Markets equities, but net underweights on GEMs have declined by 12 percentage points since January to a net 1 percent.
Sentiment towards gold is also improving. Forty percent of survey participants expect the price to be higher in 12 months’ time. Last month, bears on the precious metal still outnumbered bulls.
Only a net 3 percent now considers gold overvalued, compared to a net 20 percent as recently as December.
Many investors continue to see value in oil. A net 39 percent regard crude as undervalued, down slightly from January’s reading.
Fund Manager Survey
An overall total of 196 panelists with US$559 billion of assets under management participated in the survey from 6 February to 12 February 2015. A total of 157 managers, managing US$459 billion, participated in the global survey. A total of 93 managers, managing US$204 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.
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The BofA Merrill Lynch Global Research franchise covers over 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 2014 by Institutional Investor magazine; No. 1 in the 2015 Institutional Investor All-Europe Fixed Income Research survey; 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; and No. 2 in the 2014 Institutional Investor All-America survey. The group was also named No. 2 in the 2014 All-China survey and No. 2 in the 2014 All-America Fixed Income survey for the third consecutive year.
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