The Merrill Lynch Survey of Fund Managers for September shows confidence in global economic recovery consolidated this month after its surge in August. "Goldilocks" has been welcomed back with a slow but sustainable recovery in sight.
Investors remain optimistic that the global economy is moving out of recession and towards the "Goldilocks" scenario where conditions are neither too hot nor too cold. While a net 72 percent of the panel expects the world economy to strengthen over the coming year, the same proportion also sees "below trend growth and below trend inflation" over the next 12 months.
Cash levels increased with average cash balances rising to 4.1 percent of total assets, compared with 3.7 percent in August, which had been the lowest level since July 2007. The net number of asset allocators overweight cash increased to 10 percent from 3 percent one month earlier. The proportion of asset allocators overweight equities slipped to a net 27 percent from a net 34 percent in August. Investors lowered their allocations to eight out of 11 industry sectors. August's tentative steps back to cyclical stocks were reversed. Panelists reduced their positions in Materials, Industrials and Discretionary stocks.
"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 Banc of America Securities-Merrill Lynch Research. "Goldilocks is back in town. The consensus expects a global recovery but expects it to be below trend and not inflationary," said Michael Hartnett, chief global equities strategist.
Asset allocators are most confident on Europe in 18 months
BofA-ML says the Eurozone is close to completing the journey from pariah region to a destination of choice. Just a net 1 percent of respondents to September's global survey is underweight the Eurozone, down from 13 percent in August. It is the most positive stance on the region since February 2008 when asset allocators held a slight overweight position.
This return to neutrality represents a large swing opinion from the lows of March when 40 percent of the panel was underweight the Eurozone. Increased enthusiasm for Europe, however, has yet to extend to the U.K. This month a net 10 percent of asset allocators were underweight U.K. equities, only a marginal improvement from 13 percent in August.
Respondents are also optimistic about Europe's future. A net 7 percent of respondents said they intend to take overweight positions in Eurozone equities over the next 12 months. In July a net 30 percent said they would retain underweight positions for the following 12 months.
"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,"said Hartnett.
Fund managers within Europe bucked the global trend by reducing cash levels. A net 21 percent of respondents were overweight cash, down from 29 percent in August. The average cash balance fell to 3.0 percent from 3.7 percent the previous month.
European sector conviction at five-year low
Investors in Europe are showing a shortage of confidence and conviction in deciding which sectors to overweight. Technology and Telecoms are the sectors in which the regional panel has retained overweight positions in September. Even here, position sizes are small. The "most popular" reading typically achieves a reading of 40 percent, but this month is little over half the average.
In contrast, investors appear to be acting with conviction when deciding on their underweight positions. Investors hold high conviction in underweighting four sectors. The highest underweight score (net -41% for Personal & Household) is in line with the long-run average for the most unloved sector.
"The low level overweight readings this month show a lack of sector consensus among European fund managers and leave our measure of sector conviction at its fourth-lowest level in survey history and at its lowest since late 2004," said Patrik Schowitz, European equity strategist at Banc of America Securities-Merrill Lynch.
A total of 234 fund managers, managing a total of US$667 billion, participated in the global survey from 4 September to 10 September. A total of 189 managers, managing US$408 billion, participated in the regional surveys. The survey was conducted by Banc of America Securities - Merrill Lynch Research with the help of market research company TNS.