A BoA Merrill Lynch poll shows global investors have become more upbeat on European stocks, but they are worried about the effects on the UK of the Scottish referendum. The US is seen increasing rates next spring.

There has been a revival of confidence in the European equity market, after recent efforts to ease monetary policy further, while investors are increasingly convinced the US will put up interest rates by the spring of next year, a survey by Bank of America Merrill Lynch said today.

Belief in Europe’s stocks in September has started to recover after the heavily negative sentiment expressed in August’s survey, the latest report found.

The views on Europe are among a number of features from the report; so-called “tail risks” such as geopolitical woes are still seen as the risks most feared by respondents to the poll (39 per cent); eurozone deflation is the second-highest risk (22 per cent), followed by Chinese debt defaults. Another item is that a net 18 per cent of respondents say global stock markets are over-valued, up from a net 13 per cent taking that view a month ago.

In the wake of the decision by the European Central Bank to lower rates to close to zero, asset allocators have increased exposure to eurozone equities. A net 18 per cent are overweight the region, up from a net 13 per cent a month ago. (The net figure is produced by subtracting those who said they are underweight from overweight, in order to give an overall position.) Europe is also the region that a net 11 per cent of investors most want to overweight in the coming 12 months. Last month, a net 4 per cent of respondents wanted to underweight Europe.

An overall total of 202 panelists with $556 billion of assets under management participated in the survey from 5 September to 11 September 2014.

Global investors expect the ECB to take more action to stimulate the eurozone economy: 42 per cent of the panel now expects the ECB to start quantitative easing by the end of 2014, up from 32 per cent expressing that view in August. Furthermore, the proportion saying there will be no QE program has fallen to 19 per cent this month from 31 percent last month.

Tightening Fed
At the same time, expectations of US Federal Reserve tightening have firmed. Nearly half (48 per cent) of investors are expecting the first rate hike in nine years to take place in the second quarter of 2015, up from 38 per cent last month. Accordingly, the proportion of respondents backing the US dollar to strengthen against the euro and yen recorded a survey high of a net 86 per cent.

“This month’s survey highlights the end of US and European central bank consensus – and as the first Fed rate hike since 2006 draws closer, we’ll see a new US dollar bull market and movement out of bonds,” said Michael Hartnett, chief investment strategist at BoA Merrill Lynch Global Research.

“While investors welcome the ECB’s actions, the region is still lacking its growth mojo. It will take time for growth to materialise from policy action, and there are no guarantees it will,” said Manish Kabra, European equity and quantitative strategist.

September’s survey indicates that investors are treading water. Average cash balances, which soared a month ago to 5.1 per cent of portfolios, have fallen back in line with July’s levels at 4.6 per cent. But that does not mean investors are rushing to take on more risk. A net 22 per cent of asset allocators say they are still overweight cash (down from a net 24 percent in August).

Allocations to equities rose in September with a net 47 per cent overweight the asset class, up by a net 3 percentage points a month ago. The proportion of allocators underweight bonds fell two percentage points to a net 60 per cent. Movements in and out of sectors were limited with Materials and Energy making greatest gains.

Asia
In the Asia region, respondents have sharply cut growth expectations about China, with a net 25 per cent expecting a weaker economy, down from a net 6 per cent expecting it to get stronger. As far as Japan is concerned, a net 23 per cent of investors are overweight Japanese stocks, down from 30 per cent a month ago.

Within global emerging markets/Asia, the biggest country preference is New Zealand when weightings are compared to historical averages, the report said, while the biggest underweight is Australia. There is also a notable underweight on Singapore.

Scottish independence threat
In a topic much-discussed ahead of the 18 September vote, investors have become more negative on the UK, at least in the short run.

The UK has increased its standing as the world’s least popular region among asset allocators this month. A net 16 per cent of the panel is underweight UK equities.

Looking ahead, the UK is the region that global investors most want to underweight in the coming 12 months – with a net 14 per cent of those surveyed expressing that view. Furthermore, a net 20 per cent say that the UK has the least favourable profit outlook, up from a net 12 per cent in August.