BofA Merrill Lynch Fund Manager Survey Finds Investors Increasingly Bullish as Global Economy Regains Growth Path
Global investors have entered 2013 in buoyant but not yet exuberant
mood, according to the BofA Merrill Lynch Fund Manager Survey for
January. The new year sees asset allocators assigning more funds to
equities than at any time since February 2011, while their confidence in
the world’s economic outlook has reached its most positive level since
April 2010.
Investors’ appetite for risk in their portfolios is now at its highest
in nine years, while an increasing number judge equities as undervalued
– particularly in Europe. Moreover, investors have reduced cash holdings
to 3.8 percent from 4.2 percent in December. This marks the most
positive reading of this measure of willingness to hold riskier
investment assets since April 2011, though it has not reached levels
that would represent a contrarian sell signal.
Participants’ perception of the U.S. fiscal crisis as the biggest “tail
risk” for asset markets has calmed (down nearly 20 percentage points in
two months), though it remains their largest concern. Views of China
remain very positive, with a net 63 percent still anticipating a
stronger economy this year, but one in seven sees a Chinese hard landing
as their number one risk.
Investors’ bullishness reflects a growing confidence in economic
recovery. A net 59 percent now expect the global economy to strengthen
this year, compared to a net 40 percent a month ago. This marks the
panel’s most positive outlook since April 2010. An increasing proportion
of respondents expect inflation to pick up as well.
“Following the resolution of the U.S. fiscal cliff, sentiment has
surged. Half of investors now tell us that they would sell government
bonds to buy higher-beta stocks, which is consistent with increasing
growth and inflation expectations, and with our call for a ‘Great
Rotation’ to start in 2013,” said Michael Hartnett, chief investment
strategist at BofA Merrill Lynch Global Research. “While the survey
reveals pockets of exuberance, undemanding valuations in Europe should
underpin equities unless earnings growth fails to materialize,” added
John Bilton, European investment strategist.
“Great Rotation” gains traction
Forty-nine percent of respondents now expect government bonds to be sold
to fund purchases of higher beta equities and sustain the “risk on”
rally. Last month, in contrast, only 37 percent saw the instrument as
the likeliest source while 28 percent expected this to be reduction of
cash balances (now 22 percent) and 19 percent expected defensive
equities (now 15 percent).
In this environment, the perception of Italy as a substantial “tail
risk” for Europe has declined sharply. Only 17 percent of the panel now
views the country as the biggest threat to the European story, compared
to 26 percent in December. Assessments of the threats from France and
Spain have worsened from last month, however, up to 34 percent and 29
percent, respectively.
Sectoral swing to financials
The panel has shifted its stance on financial stocks strongly, moving to
its first net overweight in global bank names since February 2007
following a 15 percentage move versus last month. Nevertheless, banks
are still perceived as the global equity market’s most undervalued
sector. The existing overweight in insurance has also been extended,
particularly in Europe, and now stands its highest level since January
2007.
In contrast, appetite for telecoms stocks has fallen to a net 25 percent
underweight. This marks the sector’s lowest weighting from asset
allocators since December 2005. While still in positive territory,
pharmaceuticals have declined to a net 11 percent overweight. Their fall
from a net 24 percent last month is January’s largest sectoral move.
The perception that consumer staples companies are the most overvalued
has also accelerated month-on-month.
Japan enjoys sweeter sentiment
The new Japanese government’s policies continue to improve the country’s
outlook. Its growth composite indicator now stands at a striking reading
of 96.
Against this background, global fund managers are turning more positive.
A net 3 percent are now overweight Japanese equities, a sharp reversal
of last month’s net 20 percent underweight. The proportion of investors
viewing Japan as the most undervalued market increased this month as
well, while a growing number see it as having the most favorable outlook
for corporate profits.
Survey of Fund Managers
An overall total of 254 panelists with US$754 billion of assets under
management participated in the survey from 4 January to 10 January. A
total of 190 managers, managing US$586 billion, participated in the
global survey. A total of 131 managers, managing US$323 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 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 2012
Institutional Investor All-Asia survey for the second consecutive year;
No. 2 in the 2012 Institutional Investor All-China, All-Europe,
All-Japan and All-Latin America surveys; 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
in the 2012 Emerging Markets Equity and Fixed Income survey, covering
Emerging Europe, Middle East and Africa.
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. The group was also the winner of the Emerging
Markets magazine’s EM Research Global Award for 2010 and 2011.
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