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U.S. equities are the primary beneficiary of the continuing upswing in global investor sentiment, according to the BofA Merrill Lynch Survey of Fund Managers for December.

A net 44% of the respondents predict the world’s economy to strengthen in 2011, compared to 35% a month earlier. A net 51% anticipate corporate profits improving next year, up from 36% in November. At the same time, more investors believe that inflation is likely to rise with a net 61% of the panel forecasting higher core inflation in 2011.

With Europe’s sovereign debt crisis continuing, investors are turning to U.S. equities. A net 16% of asset allocators are overweight U.S. stocks up from a net 1% in November. A net 4% are underweight eurozone equities, compared with a net 15% overweight in November. Bullishness towards the U.S. dollar is evident with a sharp increase in the number of investors forecasting dollar appreciation. A net 36% expect the dollar to make gains in 2011, up from a net 14% in November. In the U.S. regional survey, the net%age of U.S. investors expecting double-digit profit growth has doubled month-on-month to 40%.

“Despite rising confidence in global growth, the survey shows that Europe is losing investor support as political procrastination and banking concerns overshadow a strong corporate outlook,” says Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.

“The pending new tax deal in the U.S., combined with QE2, has restored confidence in the prospects of U.S. companies, at a time that Europe is out of favor and investors are questioning Chinese growth prospects,” says Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research.

Corporates Urged to Step up Investment

            
Global investors are giving corporates the green light to step up capital expenditure. A net 62% of the panel say that companies are broadly under-investing – the highest such reading since the Fund Manager Survey started posing the question in August 2005. Investors’ number one preference for use of cash has switched to capital spending with 45% of the panel prioritizing it. In November “returning cash to shareholders” was top choice. Investors are also increasingly convinced that companies should borrow more. A net 44% of respondents believe corporate balance sheets are under leveraged, compared with a net 41% in November.

Energy Dislodges Technology

Energy has dislodged technology from its pedestal as the world’s favorite stock sector for the first time in a year. Technology had been the top pick for 11 consecutive months since January. A net 38% of asset allocators are overweight energy, up sharply from a net 24% in November. A net 34% of the panel is overweight technology, a monthly fall of one%age point. A second large gainer was materials, with an extra 8% of respondents moving to overweight positions. Both Energy and Materials are sectors that traditionally benefit from rising inflation.

Banks lost further ground, with a net 28% of global investors underweight the sector. European investors were especially fast to move out of Bank stocks. A net 47% of European respondents are now underweight banks, up from a net 22% in November.

Europeans Remain Positive

Aside from their mass movement out of financial stocks, European investors are keeping cool heads. A net 26% of European respondents expect the region’s economy to improve in 2011, up from a net 23% in November. A net 34% are forecasting earnings per share to grow next year, compared with a net 29% a month previously.

Cash holdings in the region have ticked upwards, but only modestly, with average cash positions up by 0.1% to 3.0% of a portfolio month-on-month. “Europeans are looking beyond the noisy process of politics, but believe that a solution to the sovereign debt crisis will be found, and that economic growth and corporate profits will progress in the coming year,” says Patrik Schöwitz, European equities strategist at BofA Merrill Lynch Global Research.

A total of 209 fund managers, managing a total of US$569 billion, participated in the global survey from 3 December to 9 December.

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