Fund managers scale back risk-taking in May; German economic sentiment slides

Global Economy
Fund managers scale back risk-taking in May; German economic sentiment slides
By Michael Hennigan, Finfacts founder and editor
May 14, 2014 - 6:54 AM

Printer-friendly page from Finfacts Ireland Business News - Click for the News Main Page - A service of the Finfacts Ireland Business and Finance Portal

Global fund managers have increased cash and scaled back risk-taking, amid fears of geopolitical instability and questions about the strength of the global economic recovery. Meanwhile German economic expectations have worsened in May 2014. The ZEW Indicator of Economic Sentiment has fallen by 10.1 points and now stands at a level of 33.1 points (historical average: 24.7 points) - The Centre for European Economic Research (ZEW - - Zentrum für Europäische Wirtschaftsforschung) in Mannheim is a nonprofit and independent institute. It was founded in 1990 on the basis of a public-private initiative in the federal state of Baden-Württemberg in co-operation with the University of Mannheim.

The Bank of America Merrill Lynch Fund Managers' Survey for May found that investors are sitting on more cash and have reduced equity holdings compared to a month ago. Average cash levels have reached 5% of portfolios – the highest level since June 2012 and up from 4.8% in April. A net 22% are taking below normal levels of risk, up from 11% a month ago. The proportion of asset allocators overweight equities has fallen to a net 37% from a net 45% last month.

Respondents to the global survey are confident that both the world economy and corporate performance are improving, but question the rate of growth. A net 66% of the panel expects the economy to strengthen in the coming 12 months, up from a net 62% in April. A net 49% say that corporate profits will rise in the coming year, up five percentage points month-on-month. But nearly three-quarters (72%) predict “below trend” growth for the global economy, and a net 20% say it’s unlikely corporate profits will grow by 10% or more in the year ahead.

Commenting on Tuesday, Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch Global Research, said: “Investors are showing belief in the economy but with two big question marks: Are we on the brink of a disruptive event? And why, at this point in the cycle, isn’t this recovery stronger?”

Momentum builds behind Europe - Europe is the region most in favour looking ahead. A net 28% say that it’s the region they most want to overweight in the coming 12 months, up from a net 23% a month ago. A net 14% say that European equities are undervalued.

Chicken and egg question over putting cash to work - while investors have increased their cash levels close to two-year highs, they remain keen to see companies put their cash to work. A net 66% of the global panel says that corporates are under-investing, up two percentage points on April’s figure. And 60% say that “increasing capital spending” is the best use of cash flow, up from 58% last month.

The indicator reflecting the expert’s assessment of the current economic situation for Germany has improved by 2.6 points in May, reaching a level of 62.1 points. Economic Expectations for the Eurozone have also lost ground in May. The respective indicator has declined by 6.0 points and now stands at 55.2 points. The indicator for the current economic situation in the Eurozone has gained 4.9 points, reaching a level of minus 25.6 points in May.

"The decline of the experts’ economic expectations for Germany should be seen against the backdrop of a strong economic development in the first quarter of 2014. Already, there are indications that Germany will not be able to maintain this fast pace of growth. Nevertheless, one can assume a positive underlying trend for the economic development for the year 2014," said Prof Clemens Fuest, ZEW president.

248 analysts participated in the May ZEW survey which was conducted during the period 4/28-5/12/2014. Analysts were asked about their expectations for the next 6 months.