Calls for Higher Capex at Five-Year High

Investors' desire to see corporates increase capital expenditure is at its highest in five years, according to the BofA Merrill Lynch Survey of Fund Managers for April. Forty-nine percent of the global respondents want companies to prioritize capital investment over alternatives including repaying debt and increasing dividends. Only 12 percent are urging corporates to prioritize balance sheet caution, down from 18 percent one month ago.


The survey also shows that investors have regained their appetite for risk despite rising concerns over the world economy and the corporate profit outlook.


Spurred by growing conviction that rates will remain low, investors have reduced their cash holdings and increased equity positions, most notably in global emerging markets. Average cash balances have fallen in April to 3.7 percent of portfolios, down from 4.1 percent in March. A net 11 percent of respondents are overweight cash, down from a net 18 percent last month. A net 50 percent of asset allocators are overweight equities, up from a net 45 percent one month ago.


Appetite for emerging market stocks has bounced back with a net 22 percent overweight, up from a net zero percent in March. Asset allocators have also increased their exposure to commodities with a net 24 percent overweight the asset class this month, up three percentage points on March.


Investors are putting cash to work while displaying concerns about the outlook. The proportion of the panel believing the world economy will strengthen in the next 12 months has fallen to a net 27 percent from a net 58 percent in February. Similarly, only a net 19 percent of respondents believe corporate profits will improve in the coming year, compared with a net 32 percent in March.


Forty-two percent of the panel believes that the world economy faces below-trend growth and above-trend inflation. At the same time, a significant number, 29 percent, expects above-trend growth and above-trend inflation. Energy, frequently used by investors to hedge against inflation, has become the number one global equity sector this month. Other sector allocations indicate a preference for defensive sectors such as pharmaceuticals.


"Central banks have succeeded in re-inflating economies, but investors are split on whether they have stimulated real economic growth," says Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research. "Investors are reluctantly overweight equities," adds Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research. "The combination of zero rates and rising inflation makes them fearful of bonds and cash."


Emerging Markets Bounce Back


Deepening fears about the future of China's economy have failed to quell the rebound in positive sentiment towards emerging market equities, especially in Asia. A net 25 percent of respondents to the regional survey expect China's economy to weaken in the coming year, up from a net 15 percent in March.


Still, sentiment towards the region's equities has improved. A net 22 percent of the panel says that emerging markets is the region that they most want to take an overweight position in the future, the highest reading of all regions this month.


Behind the optimism over emerging market equities is belief in the profit outlook. A net 28 percent of respondents believe that EM corporates have the most attractive profit outlook. Among global emerging markets investors, Asia is the most preferred market for 58 percent of those surveyed, while Latin America is the least preferred.


Investors are looking favorably towards the U.S. A net 30 percent of asset allocators are overweight U.S. equities in April, up from a net 23 percent in March. A net 48 percent believes that the outlook for U.S. corporate profits is stronger than any other region.


European investors are also mirroring the global trend of increasing risk in the face of lower expectations. Concern about the future is particularly strong among European investors. Only a net 8 percent of the European panel believes the region's economy will strengthen in the next 12 months, down sharply from a net 32 percent in March. However, cash positions fell in April to an average 3.3 percent of portfolios, down from 3.7 percent in March.


Belief in Japanese Growth Halts


Four weeks after the earthquake and tsunami in the northeast of Japan, domestic and international investors have taken sharply negative views on the country. Within Japan, belief in economic growth has come to a halt - respondents are evenly split on whether the economy will grow or slow in the next 12 months.


International investors have reduced their exposure to the country's equities. A net 18 percent of asset allocators are underweight Japanese equities this month, compared with a net 8 percent overweight in March. One in six respondents is "aggressively underweight" Japan, though one third of the panel remains neutral. The outlook points to further selling of Japanese equities, however. A net 16 percent of the panel says that Japan is the region in which they are most likely to take underweight positions.




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