Investors started 2009 with a vigorous appetite for risk and a renewed willingness to buy into laggard sectors and regions, but concerns over the financial health of a number of Eurozone countries and monetary tightening in China has caused investors to position themselves for halts in both Europe and China’s economic recovery, according to the latest BofA Merrill Lynch fund manager survey.
The February edition of the survey revealed investors have scaled back their growth expectations, retreated into cash and are increasingly sceptical that the European Central Bank will increase interest rates at all this year.
Fiscal tightening
Investor opinion about the near future of the European economy hangs in
the balance—just 51% of European investors surveyed this month expect
the region’s economy to grow in the coming 12 months. This is a
substantial drop from January’s 74% reading and goes hand in hand with a
significant jump in the number of asset allocators who think the ECB
will not raise rates until 2011. Last month just 19% of European fund
managers were forecasting no rate hike this year but this has now surged
to 45% in the region, while 42% of global fund managers are now saying
they don’t expect the US Federal Reserve to increase rates before 2011,
up from 27% last month.
Investors purge their risk appetite
The return of risk aversion is illustrated in a multitude of ways: a
flight to cash has seen average global cash balances rise to 4.0% from
3.4 % in January; hedge funds have scaled back leverage to less than one
times from 1.33 times; Europeans have poured out of financial stocks
amid fears of exposure to troubled economies; and, in turn, global
investors now say Europe is the region they would most like to
underweight.
The BofA Merrill Lynch survey registered a stark shift into cash, with a net 12% of global asset allocators now overweight cash—the highest level since June 2009 and a notable change from just a month ago, when a net 8% were underweight cash.
As mentioned above, the vigorous appetite for equities highlighted last month has done a U-turn and now just 33% of fund managers say they are overweight equities, down from a net 52% in January. Unsurprisingly, this shift has been accompanied by a gradual move back into fixed income, with a net 39% of asset allocators now underweight bonds versus 52% last time round.
Furthermore, with commodity-hungry China dominating the headlines of late, commodities have fallen in popularity so that only 10% of global investors are overweight the asset class this month, down from a net 23%. In contrast, however, a net 18% of respondents to the global survey said they see crude as undervalued, reacting to a near-10% slide in the price of oil over the last week (during which the survey was carried out).
Regional sentiment
We’ve already touched on global asset allocators’ loss of faith in
Europe—they are underweight the Eurozone for the first since September,
with a net 11% reporting underweight positions versus 2% overweight in
January—but even the unpopular UK has dropped further in managers’
estimations. The country has long been one to underweight for global
investors—indeed last month’s survey revealed it to be the least popular
region to put your money in—but this underweight has now jumped to a net
33% in February from 16%.
Viewing sentiment surrounding Europe at the moment, Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research, offered some words of comfort: “Investors are questioning whether this is a pause in growth or a trend reversal. We believe it’s the former.”
In Asia, attempts by the Chinese government to curb economic growth has seen investor optimism over the country’s future fall at the fastest pace ever recorded by the survey: now just 7% net of the global panel expect China’s economy to strengthen in the coming 12 months down from a net 51% a month earlier and the lowest reading since March 2009. “At least in terms of investor growth expectations, China has experienced a ‘double-dip’,” said Michael Hartnett, chief global strategist at BofA Merrill Lynch Global Research.
Hartnett added: “Concern over European sovereign debt and Chinese tightening means the level of US dollar bulls is at a 10-year high, and banks are once again the least loved global sector.”
Sector bias
Indeed, banks have fallen out of favour fast. Just over half of global
respondents are underweight bank stocks compared with 16% in January, a
monthly swing of 37% and the highest underweight since March 2009, the
survey revealed. Incidentally, this is also the largest conviction
underweight position survey has seen for any sector in seven months as
sector conviction has generally been subdued of late. Together, these
readings suggest an overshoot in negativity towards the banks sector,
BofA Merrill Lynch said in an investment strategy note.
“What’s happened in Greece has prompted questions about banks’ lending positions and exposure to other peripheral economies,” commented Gary Baker, “There’s also a fear that banks’ cost of capital will rise.”
However, the banking sell-off was concentrated in Europe: investors in the US actually reduced their underweight positions this month so that a net 24% of global respondents are now underweight on the sector versus 38% net in January.
Other sectors that saw asset allocators reducing positions include basic resources, oil & gas, autos, and insurance and financial services, though compared to the flight from banks their drop in popularity was relatively mild.
On the upside, investors unsurprisingly increased positions mostly in defensive sectors, with personal & household goods and food & beverages the two biggest gainers, followed by tech and travel leisure. Another positive move was, interestingly, a marginal increase in the popularity of industrials, the survey showed, which means this is now the most popular sector in Europe, followed by healthcare and oil & gas. “This most-loved status for Industrials looks odd next to such pessimism on the Banks and, in our view, may well prove to be the peak for now—and from a contrarian perspective fits well with our recent downgrade of industrials to neutral,” BofA Merrill Lynch analysts commented in a research note.
