Investors have started 2014 more optimistic about global growth prospects, especially for the US but increasingly for Europe as well, according to the BofA Merrill Lynch Fund Manager Survey for January.
The proportion of investors who believe the global economy will strengthen this year has risen to a net 75 per cent from a net 71 per cent in December, continuing a trend of rising optimism that started in late 2012.
This optimism is reflected in rising expectations for corporate profits with a net 48 per cent looking for an improvement, up from a net 41 per cent in December. Among the regions, a net 29 per cent of investors choose both the US and Japan with the most favourable prospects for profits. Europe has improved to a net eight per cent expecting profit improvement from a net four per cent expecting deterioration in the December survey.
As investors’ growth convictions rise, investors’ preference for global equities remains strong. A net 55 per cent say they’re overweight equities, continuing a trend which started in mid-2012 when a net 4 per cent were underweight equities. Confidence in equities is maintained despite a net 7 per cent of respondents believing equity markets are overvalued, the highest reading since 2000. The overvaluation view is driven predominantly by the views on US equities where a net 72 per cent say stocks are overvalued.
Global growth expectations also raised risk taking capacity. A net 4 per cent of investors say they are undertaking a higher than normal level of risk in their portfolios, a near-record high. This rise in risk appetite is reflected in sector allocation where a net 42 per cent of respondents are overweight in tech stocks, but a net 32 per cent are underweight staples, the lowest in a decade.
“Until corporations reduce high cash levels, investors will run high cash levels and equity corrections will be extremely limited,” says Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
“Managers are positioned for a strong profit recovery in Europe, and the upcoming earnings season is key to maintaining this stance; given the high sentiment, any earnings disappointment will likely be punished by investors,” says John Bilton, European investment strategist.
Investors increasingly believe companies should be using their rising profits to grow their businesses – a net 67 per cent believe companies are under-investing, a record high reading in the history of the survey. And when asked what companies should do with excess cash, 58 per cent favoured capex, while only 11 per cent want cash preservation.
Against the broader global background of rising optimism from growth and profits, global emerging markets remain out of favour. A net 61 per cent expect a sharp deterioration in profits in GEM equities, up from net 32 per cent expecting the same in December.
Furthermore, investors believe the biggest “tail risk” to the global outlook is a China hard landing and commodity collapse – some 37 per cent of investors take this view, compared with the 14 per cent given to each of the EU sovereign/banking crisis and a geopolitical crisis.
As for Europe, a net 22 per cent believe equities in the region are under-valued up from net 15 per cent expecting the same last month. On a 12-month view, when asked which equities they would most like to overweight, investors picked Europe with a net 34 per cent, the second-highest reading in the history of the survey.
Likewise, for the same timeframe, only Japan scored a positive with a net 12 per cent would like to overweight, while a net 13 per cent and a net 28 per cent expect to underweight US and GEM equities respectively.
Risk-taking by investors is near historic highs. A net four per cent of investors say they are taking higher-than-normal risks. That’s up from a net zero per cent in December and a net negative four per cent in November. Since the start of this survey this figure has been solidly positive on only three previous occasions.
This appetite for risk is also reflected in investors’ preferred sectors – tech, industrials and banks top their overweight lists while utilities, staples and telecoms languish in underweight territory.