Improved Growth Outlook Supports Keeping Faith
With Equities
Global investors are keeping faith with equities while raising
cash as markets enter the volatile year-end period, according to
the BofA Merrill Lynch Fund Manager Survey for December.
Asset allocators have hiked their cash holdings to an average 5
percent. Moreover, a net 28 percent are now overweight relative to
their benchmarks. This is the survey’s highest reading on this
measure since June 2012.
Despite this defensive move, respondents show renewed confidence
in the global economy. A net 60 percent now expect it to strengthen
over the next year – up almost 30 percentage points in two months.
Against this constructive background, they are also more confident
that corporate earnings will rise.
At the same time, inflation expectations have fallen to their
lowest level since August 2012.
Commodities are a significant factor in this. A net 36 percent
of fund managers view oil as undervalued following its recent price
fall. This reading is up over 20 percentage points since October
and represents its lowest level since 2009.
In addition, expectations of European economic performance have
improved. This reflects the likelihood of the European Central Bank
beginning a program of quantitative easing next quarter – as 63
percent of respondents now expect, compared to November’s 41
percent. This translates into higher appetite for eurozone
equities, notably banks, revealed in the survey.
“We are seeing capitulation out of energy and materials to the
benefit of the dollar, cash, eurozone stocks and global tech and
discretionary stocks,” said Michael Hartnett, chief investment
strategist at BofA Merrill Lynch Research. “The prospect of ECB QE
has brought growing consensus on European equities, but the
weakening business cycle and falling commodity prices are working
against true earnings recovery,” said Manish Kabra, European equity
and quantitative strategist.
Benign inflation ups growth expectations
A growing number of investors now anticipate a favorable
scenario of above-trend growth and below-trend inflation over the
next 12 months. While this is still a minority view (with the
majority anticipating that both growth and inflation remain
below-trend), its reading has jumped five percentage points
month-on-month.
A net 20 percent now expect higher global consumer prices in the
next 12 months. This is down from last month’s net 35 percent.
In this environment, respondents view global fiscal policy as
too restrictive. This month’s net 26 percent is the survey’s
highest reading on this measure since July 2012.
Commodity collapse
Commodities have fallen sharply out of favor. A net 26 percent
of fund managers are now underweight the asset class. This is up
from November’s net 18 percent and marks the survey’s lowest
reading on this measure in a year.
This shift is also evident in strong moves in investors’
positioning. Both the energy and materials sectors saw 19
percentage-point month-on-month increases in net underweights.
Commodities’ fall has intensified bullishness on the U.S.
dollar. While funds continue to view long exposure to the U.S.
currency as the most crowded trade in financial markets currently,
they still regard the dollar as significantly undervalued.
Europe finds favor
Appetite for eurozone equities has risen to a net 26 percent
overweight, up from November’s net 8 percent. Intentions to own the
market have also risen, with Europe now the region fund managers
are most likely to overweight over the next year.
A net 19 percent regard eurozone equities as undervalued. This
reading is up from November’s net 12 percent.
Regional fund managers have raised their exposure to European
banks in particular. A net 13 percent are now overweighting the
sector, compared to last month’s net 3 percent underweight.
In contrast, investors have less conviction towards U.S. and
Japanese stocks. With the U.S. market appearing overvalued to a
strong majority of the panel, a net 10 percent now intend to
underweight it in the coming 12 months.
Fund Manager SurveyAn overall total of 214 panelists with US$604
billion of assets under management participated in the survey from
5 December to 11 December 2014. A total of 165 managers, managing
US$446 billion, participated in the global survey. A total of 99
managers, managing US$264 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.
BofA Merrill Lynch Global ResearchThe BofA Merrill Lynch Global
Research franchise covers nearly 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 2013 by
Institutional Investor magazine; 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; No. 2 in the
2014 Institutional Investor All-America survey; and No. 2 in the
2014 All-China survey. The group was also named No. 2 in the 2014
Institutional Investor All-Europe Fixed Income Research survey; and
No. 2 in the 2014 All-America Fixed Income survey for the third
consecutive year.
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