Investors embraced riskier assets, notably equities and commodities, after the resumption of quantitative easing (QE) but a correction could be nearing, according to the BofA Merrill Lynch Survey of Fund Managers for November.
A net 35% of investors see the global economy strengthening in the next year, compared to 15% a month earlier. A net 41% anticipate corporate profits rising by 10% or more in the same period. This constructive outlook has left a net 41% of fund managers overweight equities, up from 27% in October. Their investment strategies have now risen to a normal level of risk-taking, compared to a net 33% reporting below-normal stances as recently as September.
While QE and positive macroeconomic data have bolstered the growth outlook, with the exceptions of China and Europe, the survey also reveals increased concern over inflation and warning signs of a potential near-term market correction. The number of global investors overweight cash has reached a seven-year low as more focus on the near term. A net 30% say their investment time horizon is shorter than normal, up from 25% a month ago.
"It's possible that the year-end rally has already happened, leaving investors vulnerable to event risk such as a deepening European sovereign debt crisis or a dollar rally," says Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research.
Allocating Assets to Ride Inflation Expectations
Investors and asset allocators have headed into positions that take advantage of and protect against higher inflation. November's survey shows significant shifts into equities and commodities.
The proportion of investors expecting inflation to rise in the next 12 months has spiked to a net 48%, up from a net 27% in October. A net 45% believe that global monetary policy is "too stimulative," after the second round of quantitative easing by the U.S. Federal Reserve.
A net 41% of asset allocators were overweight equities this month, up from a net 27% in October and a climb of 31% since September.
Allocations to global emerging market equities (GEM) have continued to rise and this month reached their highest level in nearly seven years. A net 56% of the panel is overweight GEM, up from a net 32% just two months ago.
Commodities have also grown in popularity with a net 21% of asset allocators overweight the asset class, compared with 17% a month ago. Investors have also increased their equity allocation to Basic Materials stocks with a net 21% overweight the sector, up from a net 9% in October.
In contrast, allocations to bonds slipped further with a net 36% of the panel underweight bonds in November, up from a net 24% in October.
Sovereign Worries Dampen European Outlook
More than a third of global investors have identified EU sovereign funding as their key risk. Concern about the public finances of several EU states is reflected in a cautious outlook for the European economy. A net 23% of European respondents expect the region's economy to strengthen in the coming 12 months. This represents a more muted pickup in outlook than elsewhere except China, where a net 16% of respondents now expect a stronger economy, down from October's 19%.
Overweight positions in eurozone stocks increased in November to a net 15% of investors, up from October's net 3%. But the proportion of investors who name the region as their top pick for underweighting in the next year also rose to a net 12%.
"As concern about EU sovereign debt risk grows, European investors are focusing on growth drivers outside the region," says Patrik Schowitz, European equities strategist. "Investors' highest equity allocations are to resources and exporting sectors such as technology and industrials."
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