Risks that the US economy could lose momentum – as highlighted by recent rows in Washington about debt – has dented investors’ economic optimism, according to the Bank of America Merrill Lynch fund management survey for October.

The survey, carried out from 4 October to 10 October, was conducted before a last-minute deal was struck between US president Barack Obama and Congress to hike the US debt ceiling and head of the risk of an embarrassing debt default. The agreement was followed by a market rally, although underlying fiscal issues in the US remain.

In the poll of 235 panelists with $643 billion of assets under management, it found that the number of investors believing the global economy will strengthen had fallen to a net 54 per cent from a net 69 per cent in September, albeit still at historically strong levels.

A net 71 per cent of respondents expect economic growth to remain “below trend” in the coming 12 months, up from a net 61 percent a month ago. Concern about US fiscal tightening is now the number one “tail risk” for 24 per cent of the panel, up from only 6 per cent in September.

Expectations for a recovery in corporate profits have also fallen. Last month, a net 41 per cent said they expected corporate profits worldwide would improve in the following 12 months – that figure has tumbled to a net 28 per cent in October. A net 18 per cent believes that corporate profit margins will decrease in the coming year, up from a net 11 per cent a month ago.

Equity holdings

The survey found that asset allocators have scaled back their equity holdings. A net 49 per cent of global investors are overweight equities, down from a net 60 per cent taking that stance in September.

Over the past month, investors have reduced their positions in eight out of the 11 sectors monitored by the survey. Last month, a net 9 per cent of the panel remained overweight US equities, and this month, that measure has dropped to zero. At the same time, investors have shifted back towards fixed income, scaling back their underweight positions in bonds and portfolio cash levels rose.

“Events in Washington clearly caused investors to shift back towards their benchmarks, but asset price gains can still be driven by high cash levels,” said Michael Hartnett, chief investment strategist at BoA Merrill Lynch Global Research.

“Strong flows into Europe would call for a touch of near-term caution, but solid macro momentum in the region suggests that any dips in EU equity markets would be enthusiastically bought,” said John Bilton, European investment strategist.

European equities

Europe has been able to avoid the downward shift in global sentiment with equity allocations reaching a six-year high. A net 46 per cent of asset allocators are overweight European equities, up from a net 36 per cent September and representing the highest reading since 2007, the survey found.

Global investors’ outlook for European corporate profits has continued to rise uninterrupted. It is now at its most positive level since September 2007. A net 10 percent of the panel says the eurozone is the region with the most favourable outlook, up from two months ago when a net 5 per cent forecast falling profits.

Japanese equities have also resisted the global trend in October to record a second successive month of improvement. A net 30 per cent of global asset allocators are overweight the region, up from a net 22 per cent in September.

Investors and asset allocators have increased allocations towards global emerging market equities and have indicated in October’s survey that they see value in the region. The signals towards global emerging markets are not universally positive, however, the survey found. Asset allocators scaled back their underweight positions. A net 10 per cent of the panel was underweight emerging markets equities in October, improved from a net 18 per cent underweight a month ago. On average, a net 26 per cent of investors have been overweight the region.