Global investors have regained an appetite for
risk against the backdrop of strong liquidity and a fairly positive economic
outlook, according to the BofA Merrill Lynch Fund Manager Survey for June as a
net 66% of respondents expect the global economy to strengthen over the next
year. This bullish reading is unchanged from last month’s survey. However,
concern at the pace of expansion is rising. A net 78% now anticipate below-trend
growth over the next 12 months. In response, more investors than ever before
(63%) are calling on companies to increase their capital spending.
Equities are in greater favour than at any time since the start of the year. A
net 48% of asset allocators report overweights, up 11%age points month-on-month,
even though a net 15% now regard the asset class as over-valued – this measure’s
strongest response since 2000. Appetite for real estate has also risen. The net
6% overweight reported ranks as the highest in eight years.
In contrast, underweight positions in bonds (now regarded as over-valued by a
net 75%) have reached their highest level since the end of 2013.
The prospect of debt defaults in China has strengthened as the most significant
risk on investors’ horizon. It is now cited by 36% of respondents. 20% worry
most over potential ‘asset mania’ – a new category introduced in the survey this
Even so, investors have reduced their cash buffers. Although still somewhat
high, average holdings of 4.5% are at their lowest since January.
“Although fund inflows and oil prices argue for near-term consolidation, the
case for a summer ‘melt-up’ remains stronger than for a meltdown as high
liquidity and low growth force investor cash levels down,” said
Michael Hartnett, chief investment strategist at BofA
Merrill Lynch Global Research.
“Europe has been a cheap way to get equity exposure, but investors no longer see
Europe as cheap. This together with some uncertainty on the level of growth may
be why optimism is starting to wane,” said Obe Ejikeme,
European equity and quantitative strategist.
European QE postponed: Investors no longer
see quantitative easing by the European Central Bank as imminent. 42% of
respondents anticipate any ECB program coming in Q4 or even 2015, up from 19%
last month. A further 22% expect no action.
Against this background, longer-term conviction
towards European equities has started to decline. A net 21% now see Europe as
the equity market they are most likely to overweight over the next year, down
seven percentage points month-on-month.
However, current allocations suggest global investors are not yet ready to give
up on the region. Net overweights have risen for the second consecutive month,
to a net 43%.
Elsewhere, regional fund managers are already showing signs of caution. A net 6%
of now regard European equities as over-valued – the highest proportion since
2000. As recently as April a net 16% viewed the market as under-valued.
Japan picks up:
Japanese equities have declined 7% this year, underperforming other global
markets. The survey shows global investors treating this as a buying
opportunity. A net 21% are now overweight, up from a net 7% in May.
Moreover, a net 10% favour overweighting Japan in preference to all other equity
markets in the next year.
These changes come as regional fund managers turn significantly more positive on
Japan’s outlook than recently. A net 73% expect the country’s economy to
strengthen over the next 12 months. This represents a 20%age point rise in the
space of two months.:
Bullishness on the U.S. dollar has re-emerged
strongly. A net 79% of respondents now expect the currency to appreciate over
the next year. This stands out as one of the strongest readings on this measure
in the past 15 years.
In contrast, a net 28 and 48% expect the Euro and Japanese yen, respectively, to
weaken over the same period. The European currency’s reading has declined
seven%age points month-on-month. This appears to reflect a combination of the
ECB’s dovish stance and some weaker European macro data.
Fund Manager Survey: An overall total of 223 panelists with US$581bn of assets
under management participated in the survey from 6 June to 12 June 2014. A total
of 167 managers, managing US$422bn, participated in the global survey. A total
of 120 managers, managing US$270bn, participated in the regional surveys. The
survey was conducted by BofA Merrill Lynch Global Research with the help of
market research company TNS.