BofA Merrill Lynch Fund Manager Survey Finds Ongoing Rise in Optimism for 2014 Growth
Rising Overvaluations No Bar to Overweighting Equities
Investors start 2014 more optimistic about global growth prospects, especially for the U.S. but increasingly for Europe as well, according to the BofA Merrill Lynch Fund Manager Survey for January.
The proportion of investors who believe the global economy will strengthen this year has risen to a net 75 percent from a net 71 percent in December, continuing a trend of rising optimism that started in late 2012.
This optimism is reflected in rising expectations for corporate profits with a net 48 percent looking for an improvement, up from a net 41 percent in December. Among the regions, a net 29 percent of investors choose both the U.S. and Japan with the most favorable prospects for profits. Europe has improved to a net 8 percent expecting profit improvement from a net 4 percent expecting deterioration in the December survey.
As investors’ growth convictions rise, investors’ preference for Global Equities remains strong. A net 55 percent say they’re overweight equities, continuing a trend which started in mid-2012 when a net 4 percent were underweight equities. Confidence in equities is maintained despite a net 7 percent of respondents believing equity markets are overvalued, the highest reading since 2000. The overvaluation view is driven predominantly by the views on U.S. equities where a net 72 percent say stocks are overvalued.
Global growth expectations also raised risk taking capacity. A net 4 percent of investors say they are undertaking a higher than normal level of risk in their portfolios, a near-record high. This rise in risk appetite is reflected in sector allocation where a net 42 percent of respondents are overweight in tech stocks, but a net 32 percent are underweight staples, the lowest in a decade.
“Until corporations reduce high cash levels, investors will run high cash levels and equity corrections will be extremely limited,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
“Managers are positioned for a strong profit recovery in Europe, and the upcoming earnings season is key to maintaining this stance; given the high sentiment, any earnings disappointment will likely be punished by investors,” said John Bilton, European investment strategist.
Demand for capex reach to record highs
Investors increasingly believe companies should be using their rising profits to grow their businesses – a net 67 percent believe companies are under-investing, a record high reading in the history of the survey. And when asked what companies should do with excess cash, 58 percent favored capex, while only 11 percent want cash preservation.
Global Emerging Markets remain a drag but stars align for Europe
Against the broader global background of rising optimism from growth and profits, Global Emerging Markets remain out of favor. A net 61 percent expect a sharp deterioration in profits in GEM equities, up from net 32 percent expecting the same in December.
Furthermore, investors believe the biggest “tail risk” to the global outlook is a China hard landing and commodity collapse – some 37 percent of investors take this view, compared with the 14 percent given to each of the EU sovereign/banking crisis and a geopolitical crisis.
As for Europe, a net 22 percent believe equities in the region are under-valued up from net 15 percent expecting the same last month. On a 12-month view, when asked which equities they would most like to overweight, investors picked Europe with a net 34 percent, the second-highest reading in the history of the survey.
Likewise, for the same timeframe, only Japan scored a positive with a net 12 percent would like to overweight, while a net 13 percent and a net 28 percent expect to underweight U.S. and GEM equities respectively.
Risk-taking near historic high
Risk-taking by investors is near historic highs. A net 4 percent of investors say they are taking higher-than-normal risks. That’s up from a net zero percent in December and a net -4 in November. Since the start of this survey this figure has been solidly positive on only three previous occasions.
This appetite for risk is also reflected in investors’ preferred sectors – Tech, Industrials and Banks top their overweight lists while Utilities, Staples and Telecoms languish in underweight territory.
Fund Manager Survey
An overall total of 234 panelists with US$653 billion of assets under management participated in the survey from 10 January to 16 January 2014. A total of 185 managers, managing US$524 billion, participated in the global survey. A total of 115 managers, managing US$248 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.
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The BofA Merrill Lynch Global Research franchise covers more than 3,500 stocks and 1,150 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 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 2013 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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