Allocations to Equity Rise, Bonds Increasingly Undesired
Global investors remain confident in the outlook for economic growth despite their sharply decreased growth expectations for China, according to the BofA Merrill Lynch Fund Manager Survey for July. A net 52 percent of respondents now expect the global economy to strengthen over the next year, close to last month’s reading and up four percentage points from May’s.
Sentiment towards China has continued to worsen, however. A net 65 percent of regional panelists now see the country’s economy weakening in the next year, compared to a similar majority anticipating stronger GDP as recently as December 2012. A “hard landing” in China stands out as a major tail risk that fund managers identify, with over half (56 percent) ranking it first on this measure - compared to one-third of respondents a month ago.
Investors’ conviction that developed economies - the U.S. and Japan in particular - will still achieve growth is reflected in their growing appetite for equities. A majority of asset allocators are now overweight equities, up nine points in two months to a net 52 percent. Confidence in the U.S. is also apparent in a net 83 percent favoring the dollar over other currencies, the highest reading yet recorded by the survey.
Stances towards bonds are increasingly negative. A net 55 percent of fund managers are now underweight fixed-income instruments. They have also lifted their cash holdings to 4.6 percent. This is the highest level in a year and represents a contrarian buy signal for equities.
“With the support of a host of buy signals in recent weeks, the ‘Great Rotation’ is in full force. Our positive view of equities would be further reinforced if the loss of faith in China’s growth story turns out to be overdone,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “Global investors are trailing the eurozone’s economic momentum. They should prefer cheap domestic exposures to its rich EM exposures,” added John Bilton, European investment strategist.
GEM sentiment souring
The shift in sentiment towards China shows through in investors’ broader stance on global emerging markets (GEM). A net 44 percent now view GEM countries as offering the worst outlook for corporate earnings of any region – the most negative level yet recorded in the survey, following an 18 percentage point decline from last month. They are similarly unimpressed by the region’s quality of earnings.
GEM valuations do not appear to have yet declined sufficiently to reflect these views. Indeed, investors see eurozone equities as cheaper. A net 18 percent of fund managers are now underweight GEM equities, down from a net overweight just two months ago and the lowest level recorded in the survey since 2001. An unprecedented net 26 percent expects to underweight GEM equities on a 12-month basis.
However, Russia is attracting increased interest. A net 50 percent of specialist GEM fund managers are now overweight the country’s equities, up 12 points from last month.
Positive on Japan
Japan stands out as one of the survey’s most positive themes. Investors’ assessment of the risk of the reflationary “Abenomics” policy failing has receded sharply this month. Their view that the country offers the best outlook for corporate profits of any region has strengthened further. All regional fund managers surveyed expect companies to achieve double-digit earnings growth over the next year.
Against this background, appetite for Japanese equities has risen sharply. July’s net 27 percent overweight is up 10 points from last month, the biggest rise of any major market. Investors’ stance on the market is now almost as positive as that towards U.S. equities (up four points this month to a net 29 percent overweight).
Inflation in focus
With growth in prospect, inflation is increasingly on investors’ minds. A net 38 percent of panelists now expect global core inflation to be higher in a year’s time, a rise of seven percentage points from last month.
This is reflected in some “short-covering” in commodities, an asset class especially sensitive to inflation (though also very exposed to demand from China). A net 26 percent of panelists are now underweight commodities, up six percentage points since June to the most positive level in three months – though this is an improvement from notable weakness since June marked a record low for positioning in commodities.
An overall total of 238 panelists with US$643 billion of assets under management participated in the survey from 5 July to 11 July. A total of 178 managers, managing US$482 billion, participated in the global survey. A total of 121 managers, managing US$268 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 nearly 3,500 stocks and over 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 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-Japan survey for the second consecutive year and No. 2 in the 2012 All-China and All-Latin America surveys; No. 3 in the 2013 Institutional Investor All-Europe survey 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 No. 3 in the 2013 All-Europe Fixed Income Research survey.
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.