Investors enter 2014 optimistic about the global economy and outlook for Japanese and European equities, according to the BofA Merrill Lynch Fund Manager Survey for December.
The proportion of investors believing the global economy will strengthen in the year ahead has risen to a net 71 percent from a net 67 percent in November. Conviction in the global economy is far stronger than 12 months ago when a net 40 percent of the panel predicted it would strengthen.
Similarly, the outlook for profits has ticked upwards month-on-month and is far stronger than the end of 2012. A net 41 percent believes global profits will improve over the coming year, compared with a net 11 percent taking that view a year ago. Fifty-five percent of investors say that they want corporations to prioritize capital expenditure over other uses of cash flow. That represents a survey high and an increase from 53 percent in November and 45 percent 12 months ago.
Preference for equities over bonds remains at historically high levels. The spread between equity overweights and bond underweights stood at 118 percentage points in December, compared with 76 points one year ago and just 19 points in July 2012.
Investors demonstrated a strong preference for Europe and Japan. Global investors have increased overweight positions in Japanese and eurozone equities in the past month and indicated appetite for more, while domestic investors in each region have become more optimistic.
“Weakness in the U.S. dollar next year is the biggest threat to positioning given a consensus to go long Japanese and European cyclicals,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
“Belief in the European recovery has reached a stretched level, leaving markets vulnerable to profit taking as portfolio managers seek uncrowded alternatives,” said John Bilton, European investment strategist.
Rising conviction about Japan and eurozone
Global investors have increased allocations to Japan and Europe and suggested that they will continue to do so into 2014. A net 34 percent of asset allocators are overweight Japanese equities this month, up significantly from a net 24 percent in November. Furthermore, a net 22 percent of the investor panel says that Japan is the region they most would like to overweight.
Sentiment is also positive among domestic investors. A net 44 percent of Japanese investors responding to the regional survey expect the country’s economy to strengthen in 2014, up from a net 27 percent last month. A net 33 percent believe that Japanese equities are undervalued.
Positivity towards Europe and within Europe is strong. Allocations to eurozone equities have risen slightly from existing high levels. A net 43 percent of asset allocators are overweight eurozone equities, up two percentage points month-on-month. A net 24 percent of the panel says that the eurozone is the region they most want to overweight – although this is down month-on-month.
Investors within Europe are increasingly bullish about the region’s outlook. A net 83 percent of respondents to the regional survey believe the European economy will strengthen in 2014, up from a net 74 percent in November. A net 83 percent say recession in the region is unlikely. A net 64 percent expect corporate profits to improve in 2014.
Banks popular – commodities unpopular
Investors and asset allocators have increased allocations towards banks over the past month. The net percentage of the global panel overweight banks rose to a net 17 percent from a net 12 percent in November. European investors have moved particularly sharply into this maligned sector. A net 22 percent of European respondents said they are overweight banks this month, compared with an equal number overweight and underweight in November.
Commodities and related stocks remain deeply unpopular. A net 31 percent of asset allocators are underweight commodities, up seven percentage points month-on-month. A net 14 percent are underweight energy stocks, a monthly rise of three percentage points.
More cash on the sidelines
Average cash balances stand at 4.5 percent of portfolios, historically a level that is a positive signal for equities. A net 16 percent of asset allocators say they are overweight cash, up from a net 9 percent in November. The higher cash levels coincide with expectations of higher interest rates and a belief by three-quarters of the panel that the Fed will introduce tapering in the first quarter of 2014.
An overall total of 237 panelists with US$655 billion of assets under management participated in the survey from 6 December to 12 December 2013. A total of 188 managers, managing US$530 billion, participated in the global survey. A total of 119 managers, managing US$273 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.
The BofA Merrill Lynch Global Research franchise covers more than 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 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.