Global Fund Managers’ allocation for equities is at a multi-year high but
intention to own European stocks on a 12m view has dropped to 13 month low
according to the BofA Merrill Lynch Fund Manager Survey for July.
Bullish sentiment towards European earnings is being pared back and
valuations are no longer as supportive. Meanwhile European fund managers remain stubbornly
overweight cyclical sectors. As macro data in Europe weakens higher quality
assets in Europe continue to be supported until investor sentiment turns more
… as outlook for European macro and earnings soften European investors view on economic growth, inflation prospects and profit
outlook all moderated over the month. Investor conviction on level of growth also
weekend. Just a few months ago majority believed in doubled-digit earnings growth for European firms. Those expectations have reversed as net 33% do not expect‘>10%’ EPS growth (sell-side analyst 12m fwd consensus EPS growth is at 11%).
.. and valuations no more act as a supportive argument: Globally Equities are considered the most overvalued since May’00. However
within regional equities, Europe is considered the most over-valued region after the
The valuation perception for European stocks is at cycle highs and it no more
offers a supportive argument to own European equities.
But consensus is stubbornly bullish on cyclicals: Despite the weaker macro outlook, European investors remain OW
(overweight) cyclical sectors.
Banks, Insurance, Industrials and Tech are at the top of preferences. On the
flipside, Retail sector has by far the biggest underweight reading in over six
investors have regained a strongly bullish stance on the outlook for equity
markets in the second half of 2014.
A net 61% of global asset allocators are now overweight equities. This ranks as
the survey’s highest reading on this measure since early 2011 and represents the
panel’s second-strongest response ever.
This aggressive positioning for recovery in H2 reflects a significant increase
in investors’ inflation expectations. A net 71% expect global core CPI to be
higher in 12 months, up 13%age points since last month. This marks a cyclical
high for the survey. Exposure to commodities, an asset class especially
sensitive to inflation, has risen to its strongest in more than a year.
BofA Merrill Lynch said a
growing number of investors now see inflation moving above trend levels while
global growth remains below-trend. Confidence in macroeconomic performance still
remains fairly high, though. A net 69% forecast that the world economy will
strengthen over the next year.
Neither valuation nor tail risks deter fund managers from their optimism. A net
21% regard stock markets as overvalued – the survey’s highest reading since
2000. Concerns over potential Chinese debt defaults, “asset manias” and Eurozone
deflation have all faded since last month. The prospect of geopolitical crises
now stands out as the greatest tail risk and threat to financial market
“Improving investor sentiment on global growth, inflation, equities and
risk-taking are all testament to a potential macro normalization in the second
half. This could eventually feed into a normalization of rates. If growth does
pick up, volatility will rise too,” said Michael
Hartnett, chief investment strategist at BofA Merrill Lynch Research.
“As Europe's recovery falters the region is becoming a global passenger as
investors pin their hopes on growth elsewhere,” said
Obe Ejikeme, European equity and quantitative strategist.
Periphery appetite fading: Investors’
appetite for exposure to the Eurozone periphery is also declining. US high-yield
has overtaken EU peripheral debt (down nine points month-on-month) as the
investment trade that fund managers regard as most crowded.
Confidence in periphery equities has fallen, too. Most notably, only a net 3% of
regional investors now see Italy as one of the European equity markets they will
seek to overweight over the next year, down 16%age points from last month.
Appetite for Spain has barely weakened, however.
Call for capex: For the seventh month in a row, investors’ call for
companies to invest more in capital spending has again reached a record high.
The reading now stands at an unprecedented 65% and is mirrored by a record net
71% judging that companies are under-investing – the highest reading since the
survey began asking this question in 2005.
Conversely, those wanting companies to return surplus cash are at their lowest
level in five years. Only 18% of fund managers are looking to companies to
institute buybacks or dividend payments – or to make acquisitions for cash.
An overall total of 228 panelists with US$674 billion
of assets under management participated in the survey from 3 July to 10 July
2014. A total of 179 managers, managing US$524 billion, participated
in the global survey. A total of 113 managers, managing US$293 billion,
participated in the regional surveys. The survey was conducted by BofA Merrill
Lynch Global Research with the help of market research company TNS.
Do fund managers pose a
systemic risk? No, quite the reverse, says SI's Avi Nachmany.