Global fund managers are increasingly willing to take on risk as their belief in a ‘Goldilocks’ recovery takes hold, according to the April edition of the BofA Merrill Lynch fund manager survey. The survey, which collated the views of fund managers, managing a total of $546 billion, revealed that confidence in a robust global recovery is gaining weight and as such the number of investors taking ‘above normal’ risk in their portfolios is at its highest since January 2006. Participants painted a picture of an ideal investment environment as they become more bullish not only on macro economic growth but also on companies’ ability to increase profitability over the next 12 months.
Rising Faith in a ‘Goldilocks’ Recovery
The latest monthly survey revealed the highest proportion of respondents forecasting a ‘Goldilocks’ scenario—whereby inflation remains subdued and growth picks up briskly, i.e. not too hot and not too cold—seen since BofA Merrill Lynch started asking about such a scenario back in February 2008. A little over one fifth (21%) of those surveyed last month said they expect above-trend growth and below-trend inflation but this has jumped to almost a third (32%) in this latest survey, which was conducted over the first week of April.
Inflationary fears remain subdued and 42% of respondents expect no interest rate hike from the Fed before 2011, up from 38% in last month's survey, while for the first time ever the European manager survey revealed the majority (57%) of regional asset allocators do not expect the European Central Bank to hike up interest rates this year. The European survey, which questions a total of 161 managers in control of $359 billion in assets, also shows that inflationary concerns are muted: Inflation is seen as rising but under control, with the vast majority (75%) seeing it ‘slightly higher’ on a 12–months horizon and just 4% pointing to ‘a lot’ higher.
Clearly the European view still lags that of our US counterparts but there’s no doubt that, while economic growth optimism remains below January levels, the recovery in European confidence from the Greece-induced drop in February continues.
Here in Europe, having dropped in February and March, fund managers’ economic growth outlook has finally started to pick up in April as a net 62% now see a stronger economy 12 months out, up sharply from 45% in March, though still below January’s 74%.
In keeping with these views, average cash balances at a global level have fallen to 3.5% of a portfolio from 3.8% last month and a net 52% of respondents are now overweight equities—a notable increase on February’s 33% reading and a return to January levels. Within equities, investors have scaled back their underweight positions on banks and raised exposure to cyclical stocks. “The findings are consistent with the view that the US consumer, far from remaining in intensive care, is on the path back to good health,” commented Michael Hartnett, chief global equities strategist at BofA Merrill Lynch Global Research.
Corporate Bulls Are Sharpening Their Horns
At the corporate level, fund managers are increasingly bullish with regards to corporate profits and April’s survey shows new-found confidence that companies can not only generate larger profits but also that they can increase margins. A net 71% of the global panel is currently forecasting a rise of 10% or more in corporate earnings over the next year, a jump of 18 percentage points since last month, and 42% believe companies can expand operating margins versus 27% in March. Interestingly, for the first time since December 2007, respondents are now ranking increased dividends and capital spending as higher priorities than balance sheet deleveraging, implying that debt concerns and the balance sheet recession have finally waned. This outlook is consistent with equities outperforming corporate bonds, BofA Merrill Lynch wrote in a research note today.
Drilling down to the sector level, global fund managers are increasing their allocations of cyclical equities, with a net 27% overweight industrials and 18% overweight materials. Tech is still the big favourite, while sentiment surrounding banks is also improving—asset allocators remain underweight the banks on balance (10% net versus 24% in March) but one in six investors is now overweight banks, compared with one in ten last time round.
European Fund managers have also shifted more into cyclicals and financials this month, though conviction remains relatively low as only industrials, healthcare and insurance are showing overweights of above 10%. Industrials is the favoured sector, along with media and autos, while the least popular sectors are now real estate and utilities, which both look like contrarian buys, according to BofA Merrill Lynch. As with the global survey, the European edition revealed banks have risen in popularity but it remains one of the most avoided sectors.
In a separate survey, BofA Merrill Lynch found that Asia Pacific investors have also rotated further towards cyclicals and away from defensives and, as with Emerging Markets investors, have sharply raised their tech overweight positions. Indonesia and Taiwan are now the most favoured regions for Asia Pacific investors, while Australia has been cut to underweight from overweight and, together with Malaysia, is the least favored market in the Global Emerging Markets April survey.
UK and Europe Remain No-Go Zones But Appetite for Japan is Hotting Up
For global investors, GEM remains the region of choice for global investors, though positions were pared back for the third successive month, while Europe and the UK remain the least-favoured regions. That being said, the UK and Europe are not as hated as they have been in previous months and asset allocators have scaled back their underweight positions in these regions. Yet, in spite of recovering optimism within the region, global investors remain skeptical in the wake of the Greek debt crisis: a net 18% report underweight positions in April, down only marginally from the 21% who said so last month. For the UK, a net 20% of global investors say they are underweight in April, down only a little from 25% in March. “Continued negativity towards European equities implies catch-up potential once the Greek situation quietens down,” wrote BofA Merrill Lynch analysts in a note this morning.
Investor aversion to the eurozone is have a clear and positive impact on Japan, which is reaping the benefit of uncertainty surrounding Greek government debt and attracting an increasing amount of global managers’ assets. A net 12% of global asset allocators are overweight Japanese equities, the highest level since July 2007, bolstered by the highest level of investors predicting the yen will weaken seen in eight years. In summary, investors are overweight the US, Japan and Emerging Markets, and underweight eurozone and UK equities.
“As recently as five months ago investors regarded Europe as the most attractive play on global economic recovery,” commented Patrik Schowitz, European Equity strategist at BofA Merrill Lynch Global Research. “But with the Greek debt crisis Europe has become a no-go zone and asset allocators now view Japanese equities as a cleaner cyclical play.”
