Concerns over the imminent end of quantitative easing in the U.S. have left investors much less confident in the outlook for the global economy and corporate profitability, according to the BofA Merrill Lynch Fund Manager Survey for October.
After a sharp fall of more than 20 percentage points from September, only a net 32 percent of respondents expect the global economy to strengthen over the next 12 months. This is the lowest reading in two years. Inflation and earnings expectations have slumped: recent consensus over the world experiencing both below-trend inflation and below-trend growth is even stronger this month at 77 percent.
Monetary policy underlies this shift in sentiment. Only a net 18 percent of fund managers now view policy as too stimulative, down 14 percentage points to the lowest level since August 2012 – just before the last QE initiative in the U.S. Perceptions of monetary risk have also risen, along with Emerging Market risk.
Investors’ response has been to reduce riskier exposures. Cash balances have risen to 4.9 percent, while investment horizons have shortened and equity overweights have fallen rapidly (down a net 13 percentage points month-on-month).
Underweights in commodities have also risen, while sectors sensitive to the asset class like energy and materials have seen large moves to net underweight positions.
Respondents have lost their appetite for Emerging Markets and European equities. Both current positioning and intentions for the next 12 months have turned negative or neutral. Instead, they have regained faith in the U.S. market and increased their preference for Japan.
“Cash balances are high, but investors are retreating to benchmark positions rather than staging an exodus from markets,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “With the European Central Bank ‘hope trade’ gone, performance in European equities is reverting to fundamentals. As our view remains downbeat, we continue to favor defensive dividend yield stocks and expect any rallies in cyclical stocks to be short-lived,” added Manish Kabra, European equity and quantitative strategist.
European enthusiasm fades
Following the European Central Bank’s press conference at the start of the month, respondents are uncertain over policy in Europe. Twenty-six percent of the global panel now does not expect the ECB to initiate a program of QE, up from last month’s 19 percent.
Expectations over Europe’s growth have declined markedly. Only a net 16 percent of regional fund managers now expect the continent’s economy to strengthen over the next year. This compares to a net 45 percent last month.
The outlook for corporate profitability is heavily affected by this. After a month-on-month decline of nearly 30 percentage points, a net 52 percent now does not expect double-digit earnings growth in the region, while an even high proportion of fund managers judge earnings-per-share estimates for European companies as too high.
Against this background, positioning in European equities has declined. Only a net 4 percent of global investors report overweighting the region now, down 14 percentage points from last month.
Moreover, the market has lost its appeal as investors’ top pick for overweighting in the next 12 months. Only a net 3 percent still view it so positively.
Japanese appetite grows
In contrast, appetite for exposure to Japan has increased further. A net 14 percent of asset allocators would most like to overweight the country’s equities over the next year – a reading that is some 10 percentage points more bullish than that for any other major market.
In contrast to other regions, Japanese fund managers’ inflation expectations are on the rise. A net 46 percent expect consumer price to climb in the next year, up from a net 18 percent last month.
Investors’ increasingly negative outlook for the yen contributes to these assessments. Global fund managers are now equally bearish on the Japanese currency and the euro. This marks a striking shift from last month, when the differential between the two was more than 20 percentage points.
Fiscal and monetary concerns climb
Besides their less upbeat stance on monetary policy, panelists are also concerned over fiscal policy. A net 19 percent of global fund managers now regard fiscal policy as too restrictive.
After a 12-percentage point rise in the space of two months, this represents the highest reading on this measure in more than a year.