Global Fund Managers Look To 2014 In Optimistic Mood - BoA Merrill Lynch Poll

Tom Burroughes

18 December 2013

The monthly survey of global fund managers by Bank of America Merrill Lynch found them in a good mood ahead of 2014, with the share of those expecting a strong global economy rising in December from the previous month.

December’s poll showed that the proportion of investors believing the global economy will strengthen in the year ahead has risen to a net 71 per cent from a net 67 per cent in November. Conviction in the global economy is far stronger than 12 months ago when a net 40 per cent of the panel predicted it would strengthen.

The outlook for profits improved from the previous month, and now far improved from a year ago. A net 41 per cent of respondents said global profits will improve over the coming year, compared with a net 11 per cent taking that view a year ago.

Some 55 per cent of investors said that they want corporations to give a priority to capital expenditure over other uses of cash flow. That result represents a survey high and an increase from 53 per cent in November and 45 per cent 12 months ago taking this view.

An overall total of 237 panelists with $655 billion of assets under management participated in the survey from December 6-12, BoA Merrill Lynch said.

Gap

The gap in preference for equities over bonds remains at historically high levels. The spread between equity overweights and bond underweights stood at 118 percentage points in December, compared with 76 points one year ago and just 19 points in July 2012.

This gap is backed up by a raft of wealth managers’ comments in recent weeks pointing to a bullish stance – with caveats – about equities and concerns about bonds, particularly government debt. Expectations that low interest rates will continue, combined with some inflationary pressure, are encouraging a switch to equities from bonds, although analysts have said that so far, the “great rotation” from bonds to equities has not yet fully happened.

Regions

In other details, the poll showed that investors demonstrated a strong preference for Europe and Japan. Global investors have increased overweight positions in Japanese and eurozone equities in the past month and indicated appetite for more, while domestic investors in each region have become more optimistic.

“Weakness in the US dollar next year is the biggest threat to positioning given a consensus to go long Japanese and European cyclicals,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “Belief in the European recovery has reached a stretched level, leaving markets vulnerable to profit taking as portfolio managers seek un-crowded alternatives,” added John Bilton, European investment strategist.

Global investors have increased allocations to Japan and Europe and suggested that they will continue to do so into 2014. A net 34 per cent of asset allocators are overweight Japanese equities this month, up significantly from a net 24 per cent in November. Furthermore, a net 22 per cent of the investor panel says that Japan is the region they most would like to overweight.

Sentiment is also positive among domestic investors. A net 44 per cent of Japanese investors responding to the regional survey expect the country’s economy to strengthen in 2014, up from a net 27 per cent last month. A net 33 per cent believe that Japanese equities are undervalued.

Investors within Europe are increasingly bullish about the region’s outlook. A net 83 per cent of respondents to the regional survey believe the European economy will strengthen in 2014, up from a net 74 per cent in November. A net 83 per cent say recession in the region is unlikely. A net 64 per cent expect corporate profits to improve in 2014.

Banks return to favor

Investors and asset allocators have increased allocations towards banks over the past month. The net percentage of the global panel overweight banks rose to a net 17 per cent from a net 12 per cent in November. European investors have moved particularly sharply into this area. A net 22 per cent of European respondents said they are overweight banks this month, compared with an equal number overweight and underweight in November.

Average cash balances stand at 4.5 per cent of portfolios, historically a level that is a positive signal for equities, the survey authors said. A net 16 per cent of asset allocators say they are overweight cash, up from a net 9 per cent in November.