Investors have regained their
appetite for risk despite rising concerns over the world economy and the
corporate profit outlook, according to the BofA Merrill Lynch Survey of Fund
Managers for April.
Spurred by growing conviction that
rates will remain low, investors have reduced their cash holdings and increased
equity positions, most notably in global emerging markets. Average cash balances
have fallen in April to 3.7% of portfolios, down from 4.1% in March. A net 11%
of respondents are overweight cash, down from a net 18% last month. A net 50% of
asset allocators are overweight equities, up from a net 45% one month ago.
Appetite for emerging market stocks
has bounced back with a net 22% overweight, up from a net zero% in March. Asset
allocators have also increased their exposure to commodities with a net 24%
overweight the asset class this month, up three percentage points on March.
Investors are putting cash to work
while displaying concerns about the outlook. The proportion of the panel
believing the world economy will strengthen in the next 12 months has fallen to
a net 27% from a net 58% in February. Similarly, only a net 19% of respondents
believe corporate profits will improve in the coming year, compared with a net
32% in March.
Forty-two per cent of the panel
believes that the world economy faces below-trend growth and above-trend
inflation. At the same time, a significant number, 29%, expects above-trend
growth and above-trend inflation. Energy, frequently used by investors to hedge
against inflation, has become the number one global equity sector this month.
Other sector allocations indicate a preference for defensive sectors such as
"Central banks have
succeeded in re-inflating economies, but investors are split on whether they
have stimulated real economic growth," said Gary
Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
"Investors are reluctantly overweight equities," said Michael Hartnett,
chief Global Equity strategist at BofA Merrill Lynch Global Research.
"The combination of zero rates and rising inflation makes them fearful of bonds
Emerging markets bounce back in
spite of questions over China
Deepening fears about the future of
China's economy have failed to quell the rebound in positive sentiment towards
emerging market equities, especially in Asia. A net 25% of respondents to the
regional survey expect China's economy to weaken in the coming year, up from a
net 15% in March.
Still, the survey shows that sentiment towards the
region's equities has improved. A net 22% of the panel says that emerging
markets is the region that they most want to take an overweight position in the
future, the highest reading of all regions this month.
Behind the optimism over emerging
market equities is belief in the profit outlook. A net 28% of respondents
believe that EM corporates have the most attractive profit outlook. Among global
emerging markets investors, Asia is the most preferred market for 58% of those
surveyed, while Latin America is the least preferred.
Investors are looking favorably
towards the U.S. A net 30% of asset allocators are overweight U.S. equities in
April, up from a net 23% in March. A net 48% believes that the outlook for U.S.
corporate profits is stronger than any other region.
European investors are also
mirroring the global trend of increasing risk in the face of lower expectations.
Concern about the future is particularly strong among European investors. Only a
net 8% of the European panel believes the region's economy will strengthen in
the next 12 months, down sharply from a net 32% in March. However, cash
positions fell in April to an average 3.3% of portfolios, down from 3.7% in
Belief in Japanese growth halts
Four weeks after the earthquake and
tsunami in the northeast of Japan, domestic and international investors have
taken sharply negative views on the country. Within Japan, belief in economic
growth has come to a halt - - respondents are evenly split on whether the
economy will grow or slow in the next 12 months.
International investors have reduced
their exposure to the country's equities. A net 18% of asset allocators are
underweight Japanese equities this month, compared with a net 8% overweight in
March. One in six respondents is "aggressively underweight" Japan, though one
third of the panel remains neutral. The outlook points to further selling of
Japanese equities, however. A net 16% of the panel says that Japan is the region
in which they are most likely to take underweight positions.
Calls for higher capex at
Investors' desire to see corporates
increase capital expenditure is at its highest in five years. Forty-nine% of the
global panel wants companies to prioritize capital investment over alternatives
including repaying debt and increasing dividends. Only 12% are urging corporates
to prioritize balance sheet caution, down from 18% one month ago.
Survey of Fund Managers
An overall total 282 panelists with
US$757bn of assets under management participated in the survey from 1 April to 7
April. A total of 199 fund managers, managing a total of US$566bn, participated
in the global survey. A total of 158 managers, managing US$381bn, participated
in the regional surveys. The survey was conducted by BofA (Bank of America) Merrill Lynch Research
with the help of market research company TNS.