Despite the vast majority of global fund managers prediciting a default by the Greek government, investors are notably less worried about sovereign risk and less pessimistic about global growth than they were a month ago, according to the October edition of the BofA Merrill Lynch Survey of Fund Managers.
A whopping 92% of the 199 respondents to the survey said they expect Greece to default, with 70% forecasting a default by April of next year, but the same managers are marginally more sanguine about sovereign risk prospects. EU sovereign debt funding remains the biggest tail risk in investors' minds, but while 68% of the previous month's respondents put it in the number one spot, this has receded over the past four weeks to 61%. The figures suggest that, although the eurozone sovereign debt crisis and the potential impact it may have on global growth continue to dominate daily headlines, it's becoming yesterday's news and investors are instead starting to prepare for the next stage.
"Europe appears back from the brink," commented Gary Baker, head of European Equities strategy at BofA Merrill Lynch Research, "But it seems investors are waiting for the all clear from both Europe and emerging markets before committing cash."
Last month a net 40% were saying the eurozone is the region they would most like to underweight but this has since dropped to just 7% and, instead, more investors--a net 8%--are now saying they most want to underweight Japan in the coming year. And, while fewer investors are currently underweight eurozone equities, sentiment towards the U.K. has also improved with just 12% underweighting U.K. equities in October versus the 26% recorded in the previous survey.
Looking broader afield, it may seem counterintuitive, given that fears of recession and sovereign defaults have been tasked with dictating the direction of the world's stock markets for several weeks, not to mention several months, but the BofA Merrill Lynch survey also suggests that the outlook for growth has stabilised and fears of global recession have receded.
The proportion of the panel expecting a global recession in the coming 12 months has fallen quite dramatically, to a net 25% from a net 40% in September. And fewer managers overall now expect the the global economy will even weaken over the coming year, with a net 15% in October versus last month's net 17% pointing to upcoming weakness. Granted, it's not exactly a positive prognosis, but it's markedly less negative.
Views remain stubbornly pessimistice for Europe, however. Here, investors remain restless about the macro economic environment and concern has increased, shown by a net 37% of respondents to the European reginal survey pointing to a return to recession in Europe in the next 12 months, up from 11% a month ago.
Among specific asset classes, cash levels provide insight into the difference between what managers might be saying and what they're doing. It appears that the improvement in global sentiment hasn't necessarily fed through to cash holdings yet, with average cash balances having actually increased month on month to 5% of portfolio versus 4.9% last month. More asset allocators are also overweight cash this month.
Those that are dispensing of cash are not immediately ploughing it into equities, either. A net 7% of asset allocators are now underweight equities, more than September’s level of 5%, with emerging market equities feeling the brunt of the sell-off. In September, 30% net of respondents were overweight emerging markets equities and this has now plunged to just 9%, in conjunction with almost half of the global managers saying they expect China's economy to weaken in the coming year. To what extent it is expected to slide is not clear, however, and with this week's GDP figures showing a decline in econoimic growth to 'just' 9.1% in the third quarter, it's clear that China still has momentum.
The panel has also moved slightly underweight commodities having been slightly overweight in September. Thus, with emerging markets and commodities losing favour in recent weeks, the survey points to technology as the one last cyclical outpost of popularity. Technology retains its position as the world's favourite sector, with pharmaceuticals and staples--reflecting a more defensive stance--standing at two and three respectively.
Interestingly, a second sign that risk appetite might be stirring among some investors, according to the survey, is that bearishness towards banks has fallen sharply. At last check, a net 34% of the global panel was underweight banks down from a net 47% in September.
