Investors Cheer Up About Global Economy As Christmas Looms - BoA Merrill Lynch

Natasha Taghavi

19 December 2012

Global investor confidence is on the up, as concerns surrounding the fiscal cliff ease off, according to the Bank of America Merrill Lynch fund manager survey for December.

While a net 40 per cent of investors (a rise of 6 percentage points, month-on-month and double the reading two months ago) believe the global economy will strengthen in 2013, the number of investors viewing the fiscal cliff as the biggest tail risk has fallen to 47 per cent, down from 54 per cent taking that view in November, according to the survey.

However, despite the decline on fiscal cliff concerns, it still remains the top worry for investors, who favour emerging markets and are optimistic about China’s economic growth. A net 67 per cent of the regional survey respondents say China’s economy will strengthen in the coming year, up from a net 51 per cent in October. A net 38 per cent of asset allocators are overweight emerging market equities, double the level of September’s survey.

An overall total of 255 panellists with $664 billion of assets under management participated in the survey from 7 December to 13 December. A total of 135 managers, managing $305 billion, participated in the regional surveys. The survey was conducted by with the help of market research company TNS.

Europe vs US

Meanwhile, the survey showed that the number of asset allocators that are overweight US equities has fallen since November. However, allocations to the eurozone outweigh US allocations for the first time since 2010.

The net percentage of asset allocators that are overweight eurozone equities has risen to seven, up from a net 1 per cent in November. In terms of sector, investors have maintained a “risk on” stance – allocations to cyclical sectors consumer discretionary and industrials have increased, and the market is firmly overweight both, but the number one sector remains to be pharmaceuticals, according to the survey.

Corporate profit sentiment

For the third successive month, the outlook for corporate performance has improved; more investors are calling for companies to raise capital expenditure. A net 11 per cent of investors believe profits will improve in the coming 12 months – a 22-point swing from October when a net 11 per cent was forecast for lower profits.

According to the survey, the proportion of investors predicting worsening margins has fallen to a net 27 per cent, down from a net 33 per cent a month ago and a net 44 per cent in October. Similarly, December’s survey shows reduced scepticism over corporates’ ability to deliver double-digit profit growth. A net 37 per cent believes global corporate earnings growth will be less than 10 per cent, down from a net 52 per cent in November.

A net 64 per cent of the panel believes that companies around the world are under-investing, the highest reading in the history of the survey and an increase from a net 59 per cent month-on-month. Investors are less worried about dividends and buybacks – the proportion saying that payouts are too low has fallen to net 28 per cent from a net 34 per cent.

A net 38 per cent of investors say that global emerging market equities have the best outlook for corporate profits in the coming year, up from a net 32 per cent in November.

Japan sentiment rises

Global investor concerns surrounding Japan has eased, while domestic optimism has strengthened, according to the survey. The proportion of global asset allocators’ underweight Japanese equities has fallen to a net 20 per cent, down from a net 34 per cent a month ago.

A net 17 per cent of the global panel would like to underweight Japanese equities in the coming year, less than the net 30 per cent taking that view in November. A net 90 per cent of Japanese investors expect the economy to strengthen in the coming year, compared with a net 18 per cent in November, while a net 81 per cent is forecast for improved earnings in the coming 12 months.

Liquidity conditions improve

The survey recorded that the proportion of respondents rating liquidity conditions as “positive” rose to a net 23 per cent, up from a net 13 per cent in November. This marks the third successive month of improving liquidity ratings and follows efforts to support market liquidity by central banks, including recent rounds of quantitative easing by the US Federal Reserve.