Europe Bears Brunt of Falling Sentiment but
Emerging Markets Thrive
Rising geo-political temperatures combined with the threat of
rising U.S. interest rates have led global investors to scale back
risk and take cash levels to two-year highs, according to the BofA
Merrill Lynch Fund Manager Survey for August.
Investors have shifted robustly into cash with a net 27 percent
of respondents to the global survey overweight cash in August, up
from a net 12 percent in July. Cash now accounts for an average of
5.1 percent of global portfolios, up from 4.5 percent a month ago.
Both cash readings are at their highest since June 2012. The
proportion of asset allocators overweight equities has tumbled by
17 percentage points in one month, to a net 44 percent in August.
The number of survey respondents hedging against a sharp fall in
equity markets in the coming three months has reached its highest
level since October 2008.
Global growth predictions have fallen since July but remain
firm. A net 56 percent of the global panel expects the economy to
strengthen in the year ahead, a fall from a net 69 percent in the
previous month. However, sentiment towards Europe has fallen
significantly – the earnings outlook for the region suffered its
greatest monthly fall since the survey started.
Fears of a geopolitical crisis is the biggest cause of
risk-reduction – with 45 percent of respondents naming it their
number one “tail risk” this month, up from 28 percent a month ago.
But a new question in the survey highlights how a rate hike is also
playing on investors’ minds – 65 percent of the panel expects a
U.S. rate rise before the end of the first half of 2015.
“The market melt-up is over, or at least on pause, as investors
seek refuge while they digest world events and the prospect of
higher rates,” said Michael Hartnett, chief investment strategist
at BofA Merrill Lynch Research. “We see further de-risking to come
in Europe. Negativity in this month’s survey towards Europe
reflects growing softness in economic data from both the core and
periphery of the region,” said Manish Kabra, European equity and
quantitative strategist.
Europe’s gloss is lost
Europe’s status as the world’s market darling for much of 2014
has all but evaporated in the past month, with a big negative swing
in the number of investors currently overweight European equities
and an even greater negative swing in sentiment about the
future.
A net 13 percent of asset allocators are overweight Eurozone
equities – a fall of 22 percentage points in one month. U.S.
equities also lost ground but only a 4- percentage point drop to a
net 6 percent. Furthermore, a net 30 percent of global investors
believe that the 12-month profit outlook is worse is Europe than in
any other region. That reading has fallen 24 percentage points
since July – a record one-month swing.
It’s not surprising therefore that Europe has now become more of
a region to underweight than overweight. A net 4 percent of
investors want to underweight Europe more than any other region. In
July, a net 10 percent wanted to overweight Europe. The survey also
highlights growing pressure on the euro. A net 40 percent saying
that it is the currency they most expect to depreciate (on a
trade-weighted basis), a reading that represents a two-year high in
negativity towards the euro, up from a net 28 percent in July.
Emerging markets shine again
Global Emerging Markets (GEM), and to a lesser extent Japan,
have bucked the wider global trend of pessimism. A net 30 percent
of asset allocators are now overweight Japanese equities, a rise
from a net 26 percent in July and making Japanese equities the most
popular of the five regions.
GEM has shown the greatest momentum, with the proportion of
asset allocators overweight the region rising to a net 17 percent
from a net 5 percent in July. Behind the improvement is stronger
belief in China and in commodities. A net 6 percent of regional
fund managers expect the Chinese economy to improve in the coming
12 months – the first positive outlook of 2014. Just two months
ago, a net 42 percent forecast China’s economy to weaken.
Fewer global asset allocators are underweight commodities – a
net 5 percent compared with a net 15 percent in July. Looking
ahead, a net 21 percent of investors say that GEM is the region
they most want to overweight in the next 12 months, up from a net 4
percent in July.
Investors pursue big caps and value
Investors have expressed unusually strong opinions in favor of
large-cap stocks and value-driven investment this month. The
proportion of respondents favoring value over growth investing has
reached a record level of a net 48 percent. Value investing is
typically in favor during “risk off” phases, but the high this
month outstrips even previous highs in 2009 in the aftermath of the
financial crisis. A net 59 percent believe that large caps will
outperform small caps, the highest reading in two years.
Fund Manager SurveyAn overall total of 224 panelists with US$675
billion of assets under management participated in the survey from
1 August to 7 August 2014. A total of 177 managers, managing US$529
billion, participated in the global survey. A total of 112
managers, managing US$278 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 more than 3,500 stocks and 1,180 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
2013 Institutional Investor All-America survey; No. 2 in the 2013
All-Latin America survey; and No. 2 in the 2013 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 2013
All-America Fixed Income survey for the second consecutive
year.
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