Confidence in global economic recovery consolidated this month after its surge in August, but investors remain cautious regarding the nature of recovery, according to the Merrill Lynch Survey of Fund Managers for September.
With 75% of the global panel expecting the world economy to strengthen over the coming year, optimism was capped by the same proportion who envision “below trend growth and below trend inflation” over the next 12 months. This should produce a ‘Goldilocks’ scenario, in which economic conditions will be neither too hot, nor too cold.
European prospects
Within Europe, confidence in recovery remained stable, with growth
expectations flat-lining just short of previous highs--62% of
respondents expect a stronger economy over the next 12 months, down
slightly from 66% in August. Profit growth expectations also remained
steady, with 59% expecting stronger profits for the coming year.
Europe bucked the global trend for increased cash holdings, with average cash levels falling to 3%, from 3.7% last month. With 21% of fund managers reporting overweight allocations for cash holdings -- a figure down 8% since last month -- investors appear increasingly willing to put their money to work.
Sector conviction
Despite a general optimism regarding macro-economic recovery,
risk-appetite has been held in check, with investors displaying a clear
lack of confidence in where to position overweight bets. Whilst Telecoms
popularity rebounded from neutral, becoming the second-most-popular
sector, a lack of consensus on where to place sector overweights was
evinced by largely neutral portfolios and the small absolute size of
overweight readings. Overweights in the most popular sector, Technology,
achieved a reading of just 22% -- that’s only just over half the
long-term ‘most popular’ average of 40%.
By contrast, investors have been acting with conviction when deciding on underweight positions – which were held by 12 out of 19 sectors. Food & Beverages and Personal & Household Goods sectors saw their popularity collapse, becoming the least popular sectors. The latter registered an underweight score of -41% -- a figure broadly in keeping with the long-term average for ‘most unloved’ sector.
World view
Despite the improving macro backdrop, global investor risk-appetite has
showed no signs of heightening and exposure to cyclical sectors, usually
associated with upturns, was modest. Going against the European trend,
global investors actually increased their cash holdings, with cash
balances rising to 4.1%, from 3.5% in August. 18% of all participating
investors’ portfolios are now overweight cash -- a figure up 8% from
this time last month.
“September’s jump in cash levels and lower equity exposure shows that investors’ risk appetite lags their confidence in the recovery,” said Gary Baker, Head of European Equity Strategy at Bank of America Securities-Merrill Lunch Research. “Goldilocks is back in town. The consensus expects a global recovery but expects it to be below trend,” added Chief Global Equities Strategist, Michael Hartnett.
Regional differences
Whilst investment in emerging markets remains strongly overweight,
allocation in this region fell to 40% from 52% in August. Europe proved
the immediate beneficiary of this shift, with investors reporting
increasing confidence in the region. Just 1% of respondents were
underweight the Eurozone – the most positive stance recorded for the
region since February 2008. This optimistic swing in opinion was
bolstered by a generally positive outlook for Europe’s future, with 7%
of the panel indicating that they intend to take overweight positions in
Eurozone equities over the next 12 months.
Michael Harnett, Bank of America Securities-Merrill Lynch Research’s Managing Director and chief Global Equity Strategist, commented: “Europe’s comeback in popularity underscores how investors no longer see emerging markets as the only global growth story. Investors now have a broader regional and sector strategy.”
A total of 234 fund managers, managing a total of US$667 billion, participated in the September edition of Bank of America-Merrill Lynch's monthly fund manager survey.
