Investors are positioning themselves for slower growth in China and prolonged low inflation – sending commodities allocations to a four-year low, according to the BofA Merrill Lynch Fund Manager Survey for May.
A quarter of the respondents to May’s survey say that a hard landing in China and a commodity collapse is their number one “tail risk”, marking a notable increase in concern compared to the previous month.
Panellists are sending strong signals that they see little threat of inflation. Just under a third now expect global core inflation to rise over the coming year, down from closer to 50% in the previous month. As such, fewer institutional investors expect short-term interest rates to rise.
The response to such an outlook is one of investors reducing allocations to commodities and emerging markets and upping allocations to bonds. A net 29 percent of global asset allocators are underweight commodities, an increase from a net 11 percent in March and the lowest reading since December 2008. A net 17 percent of asset allocators remain underweight energy stocks. The proportion of global investors overweight emerging market equities has plummeted to a net 3 percent from a net 34 percent in March. A net 38 percent of the panel is underweight bonds, down from a net 50 percent in April.
Optimism Around Japan Equities Reaches 6-Year High
Despite the recent surge in Japanese equities, institutional investors continue to believe in the bull run. Allocations to Japanese equities are at their highest since May 2006 with a net 31 percent of global asset allocators overweighting Japanese equities in their portfolios. That is up sharply from a net 20 percent overweight in April.
A net 44 percent of global investors say that the outlook for corporate profits is more favourable in Japan than in any other region – the most bullish outlook captured by the survey since November 2005. Japan also remains the region that investors would most like to overweight over 12 months. A net 25 percent say Japan is at the top of their overweight list, in line with April’s reading.
Signs of Hope in Eurozone Equities
The latest of the monthly surveys of global and regional fund managers also revealed fledgling signs of optimism towards Europe, although investors within the region would like to see more policy action. Global investors are starting to see the eurozone as less of a problem and more of an opportunity. The percentage of the panel naming EU sovereigns and banks as number one “tail risk” has dropped to 29 percent from 42 percent.
Eurozone equities are considered to be undervalued by a net 38 percent of the global panel, which marks a significant increase from April results. With more investors viewing the US as overvalued, the “valuation gap” between the US and the eurozone has widened even further in the past month.
European respondents to the regional survey are more positive about growth than a month ago. A net 24 percent of European fund managers believe Europe’s economy will strengthen in the coming year, though only 17 percent see earnings improving in the next 12 months. At the same time, a little under one third of regional respondents said they believe fiscal policy is too restrictive, up from a net 19 percent last month.
Companies Should Pay Cash to Shareholders
With the prospect of corporate profits rising, investors are pressing the case for companies to pay out some cash. More than a quarter of the global panel says that payout ratios (including share buybacks and dividends) are too low. Close to 40% said their preferred use of cash flow would be to return cash to shareholders via buybacks, dividends or acquisitions, but almost half the participants would like companies to increase capital spending, while only 9 percent are prioritising debt repayment.
An overall total of 231 panellists with $661 billion of assets under management participated in the survey from 3 May to 9 May.
