Following the recent oil price spike, investors fear for corporate profitability and global growth, according to the BofA Merrill Lynch Survey of Fund Managers for March.
A net 24 percent of asset allocators now expect corporate operating margins to fall over the next 12 months. This represents the sharpest month-on-month decline since the survey began asking this question in 2004. As recently as January, a net 10 percent was expecting margins to expand. A net 32 percent of fund managers still look for corporates to increase profits in the next year, but this is down significantly from a net 51 percent a month ago. A net 31 percent now views consensus earnings estimates as too high, moreover.
This decline in confidence is reflected in the survey participants' macroeconomic outlook. A net 31 percent of fund managers still believe the global economy will strengthen in the next year, but this is down from a net 51 percent last month. In the U.S. the fall was even sharper, from a net 52 percent to a net 21 percent, while respondents in Asia outside Japan turned negative. A net 25 percent sees the region's economy weakening over the period.
While fears of recession remain remote, the threat of stagflation has risen, according to the survey findings. In the space of two months, the proportion of fund managers anticipating below-trend growth and above-trend inflation has doubled to 38 percent. Among four possible outlooks, this is now the most common among respondents.
Investors do not expect U.S. interest rates to rise any sooner as a result of the oil price shock. Three-quarters of them still see a rate hike within 12 months. But a net 35 percent expects the yield curve to flatten over the period, up from a net 14 percent in February.
No fewer than 72 percent now thinks the ECB will raise rates before July. No respondents held this view last month.
"The shift in the March survey is toward stagflation, with lower growth expectations and higher inflation and interest rate expectations causing cash levels to rise," said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research. "If the oil price reverses, this change in sentiment could prove quite fleeting. There has been no massive sell-off. Investors are in 'wait-and-see' mode," says Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
Reduced Equity Exposure Parked in Cash
Investors have increased their cash holdings in response to the uncertain outlook. A net 18 percent are overweight cash, compared to a net 3 percent underweight in February. Globally, their average cash balance rose to 4.1 percent of portfolios in March. This compares with 3.5 percent one month earlier.
They have also reduced exposure to equities and commodities. A net 45 percent reports being overweight equities in March, down from February's net 67 percent; commodity overweights fell to a net 21 percent. A net 8 percent is taking a lower level of risk than normal, compared to a net 1 percent taking higher than normal risk a month earlier.
Strikingly, this has not translated into greater enthusiasm for bonds. Investors' underweight of this asset class remains a net 59 percent, down only slightly from the previous month.
Investors have also not altered their sector allocations significantly. Their appetite for technology growth stories is still high, while they are still overweight cyclicals like basic materials and industrials too. They also remain underweight defensives such as consumer staples and utilities, though they have turned positive on pharmaceutical and healthcare stocks.
Regionally, appetite for U.S. equities declined. Fund managers' overweight fell a net 23 percent, down from a net 34 percent. In the U.S., only a net 4 percent of survey respondents see companies there increasing earnings per share (EPS) in the next year, versus 43 percent in February.
European investors' underweights on the auto and personal household goods sector increased sharply to a net 20 percent and a net 30 percent, respectively.
Confidence in China Picks Up
The survey shows the recent erosion of confidence in emerging markets starting to turn. A net 15 percent of regional fund managers now expect the Chinese economy to weaken in the next year, down from a net 27 percent in February. Globally, the identification of the Chinese real estate market as a major tail risk has also declined.
Overall, investors are neutral on emerging markets equities. Two months earlier, a net 43 percent was overweight.
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