Investor optimism over the global economic recovery and corporate profits has been dented as the tail risk associated with the U.S. economy has escalated, though sentiment towards Europe has improved, according to the BofA Merrill Lynch Fund Manager Survey for October.
The survey taken from October 4 to October 10 showed that the number of investors believing the global economy will strengthen had fallen to a net 54 percent from a net 69 percent in September, albeit still at historically strong levels. A net 71 percent expect the economic growth to remain “below trend” in the coming 12 months, up from a net 61 percent a month ago. Concern about U.S. fiscal tightening is now the number one tail risk for 24 percent of the panel, up from only 6 percent in September.
Expectations for a recovery in corporate profits have also fallen. Last month, a net 41 percent said they expected corporate profits worldwide would improve in the following 12 months – that figure has tumbled to a net 28 percent in October.
A net 18 percent believes that corporate profit margins will decrease in the coming year, up from a net 11 percent a month ago.
Asset allocators have scaled back their equity holdings. A net 49 percent of global asset allocators are overweight equities, down from a net 60 percent in September. Over the past month, investors have reduced their positions in eight out of the 11 sectors monitored by the survey. Last month, a net 9 percent of the panel remained overweight U.S. equities, and this month, that measure has dropped to zero percent. At the same time, investors have shifted back towards fixed income, scaling back their underweight positions in bonds and portfolio cash levels rose.
“Events in Washington clearly caused investors to shift back towards their benchmarks, but asset price gains can still be driven by high cash levels,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “Strong flows into Europe would call for a touch of near-term caution, but solid macro momentum in the region suggests that any dips in EU equity markets would be enthusiastically bought,” said John Bilton, European investment strategist.
Rising conviction about European equities
Europe has been able to avoid the downward shift in global sentiment with equity allocations reaching a six-year high. A net 46 percent of asset allocators are overweight European equities, up from a net 36 percent September and representing the highest reading since 2007.
Global investors’ outlook for European corporate profits has continued to rise uninterrupted by events in Washington. It is now at its most positive level since September 2007. A net 10 percent of the panel says the eurozone is the region with the most favorable outlook, up from two months ago when a net 5 percent forecast falling profits.
Positivity towards corporate Europe is also evident within the region. In August, a net 55 percent of European respondents to the regional survey said double-digit growth was unlikely in the following year. This month, a net 6 percent says that double-digit earnings growth is likely – a two-month swing of 61 net percentage points.
Japanese equities have also resisted the global trend in October to record a second successive month of improvement. A net 30 percent of global asset allocators are overweight the region, up from a net 22 percent in September.
Emerging market confidence starts to rebuild
Investors and asset allocators have increased allocations towards global emerging market equities and have indicated in October’s survey that they see value in the region. The signals towards global emerging markets are not universally positive, however.
Asset allocators scaled back their underweight positions. A net 10 percent of the panel was underweight emerging markets equities in October, improved from a net 18 percent underweight a month ago. On average, a net 26 percent of investors have been overweight the region.
A net 38 percent of the global respondents say that emerging markets equities are the most undervalued of all the regions – in contrast, a net 63 percent says the U.S. is the most overvalued region. The amount of investors naming emerging markets as the region they most want to underweight continued to fall.
At the same time, however, the outlook for China’s economy worsened. A net 5 percent of regional fund managers expect the Chinese economy to strengthen in the coming year, down from a net 28 percent in September. And asset allocators further reduced their exposure to commodities – an important proxy for emerging market sentiment. A net 28 percent of asset allocators are underweight commodities, compared with a net 16 percent in September.