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Investor confidence in global economic growth still high

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Investor confidence in global economic growth remains high even as expectations of higher short-term rates increase, according to the BofA Merrill Lynch Fund Manager Survey for April.

The survey, taken between 4 and 10 April 2014, showed that the number of investors believing the global economy will grow over the next 12 months was steady at a bullish net 62 percent, unchanged from March and higher than the 56 per cent in February.
 
That view supports expectations for profits – a net 44 per cent of investors believe profits will improve over the next 12 months, up from 40 per cent in March and the same as in February.
 
However, expectations of higher short-term rates are growing with a net 66 per cent believing short rates will rise over the next 12 months, up from 55 per cent in both March and February and the highest in three years. This expectation of normalizing monetary policies, though, hasn’t changed sentiment on long-term rates much – a net 72 per cent believes they’ll be higher in 12 months, down slightly from 74 per cent in March and 73 per cent in February. Taken together, expectations for a steeper yield curve are falling away. A net 22 per cent of investors are expecting a steepening compared with 39 per cent in March and 42 per cent in February.
 
There was a big change in sentiment among investors when choosing between value and growth stocks. In April, a net 40 per cent believed value stocks will outperform growth stocks over the next 12 months, more than triple the level in March and an all-time high.
 
The preference for value might offer one clue to the recent sell-off in technology and biotech stocks. “Recent market volatility has led investors to ‘taper’ their extreme bullishness on US growth-plays and extreme bearishness on emerging markets,” says Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
 
Regionally, a net 66 per cent of global fund managers believe the US is still the most over-valued equity market, little changed from March and February. That has many looking again at emerging markets – a net 55 per cent think these are undervalued, up from 49 per cent in March and the highest reading ever. In addition, only a net two per cent would like to underweight emerging markets, down sharply from 21 per cent in March.
 
Fund managers are taking a more guarded view of assets favoured in recent years. Topping the list of crowded trades are Long US High-Yield bonds at 22 per cent, a notable jump on the 13 per cent in March. Also, long peripheral debt was cited as a crowded trade by 19 per cent of respondents, up from 16 per cent in March.
 
“After two years of cyclical outperformance in Europe, some of the exuberance we see in investor sentiment and positioning suggests a rotation into more defensive stocks and sectors may be imminent,” says Obe Ejikeme, European equity and quantitative strategist.
 
In Japan, the boost provided by the launch of “Abenomics” over a year ago continues to wane. Only a net 13 per cent of investors are still overweight Japanese equities, down from 16 per cent in March and 30 per cent in February. Similarly, a net 16 per cent have a favourable outlook for Japanese profits, down from 18 per cent in March and 28 per cent in February while perceptions of their quality and volatility turn for the worse.

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