Next year looks set to be one of moderate economic growth, benign inflation and solid returns in global equities—according to the 302 fund managers surveyed by BofA Merrill Lynch in December.
Though managers’ risk appetite remains modest, overall optimism about the global economy strengthened this month, with a net 80% of respondents expecting growth over the next 12 months compared to just 69% in November. Two thirds of the monthly survey participants are looking for equity markets to return to traditional growth levels of better in 2010, while forecasts for corporate profits are at the highest level in six years.
Global asset allocators forecast a +7.7% return for global equities in 2010 led by the Asia-Pacific region (+9.1%) and emerging markets (+9.0%), closely followed by Europe (+8.9%) and the UK (+8.3%). The laggards are forecast to be equities in the US (+5.5%) and Japan (+7.0%).
The positive outlook comes in spite of sharp movements out of bank stocks during December, as a net 28% of respondents are now underweight bank stocks compared with 11% in November—a swing of 17% in a month where two of the largest ever bank capital raisings were successfully completed.
"A year ago strong pessimism over bank stocks would have spread across the market, but now it appears to be isolated to the banks. Investors seem to be saying they can be optimistic on markets even without bank support" said Gary Baker, head of European equity strategy at BofA Merrill Lynch Global Research.
Investors have high conviction in the attraction of equities over bonds (the latter falling to the lowest level of valuation support since April 2006). Optimism on China also remains rock solid leaving emerging markets as by far the most overweight region followed by Europe, while pessimism on the UK and Japan continues to increase, the survey results revealed.
The BofA Merrill Lynch monthly fund manager survey also illustrated that concern about inflation remains subdued from the perspective of global investors. A growing proportion of survey respondents do not expect interest rate hikes from the Fed before the second half of the year, a view echoed by European investors on the ECB—a net 44% of respondents don’t expect to see a rate hike before the fourth quarter of 2010 or even later versus 25% last month. Inflation, however, is another matter: expectations among European investors jumped to a new all-time high this month, with a net 77% seeing stronger inflation over the next year, up sharply from 60% in November, though none of the 179 managers who participated in the regional survey predicted inflation would be “a lot higher.”
Outside views of Europe remain moderately positive, with a net 11% of global asset allocators overweight the Eurozone this month, a position virtually unchanged since October when they went overweight the Eurozone for the first time since 2008. The UK, however, remains unloved with a net 18% of asset allocators underweight in December, up from 10% last month and in line with the range seen over recent months.
