More investors than ever before (63 percent) are calling on companies to increase their capital spending, according to the BofA Merrill Lynch Fund Manager Survey for June.
With strong liquidity and a fairly positive economic outlook, global investors have regained appetite for risk. A net 66 percent of respondents expect the global economy to strengthen over the next year. This bullish reading is unchanged from last month’s survey.
However, concern at the pace of expansion is rising. A net 78 percent now anticipate below-trend growth over the next 12 months.
Equities are in greater favor than at any time since the start of the year. Close to half or a net 48 percent of asset allocators report overweights, even though a net 15 percent now regard the asset class as over-valued – this measure’s strongest response since 2000.
Appetite for real estate has also risen. The net 6 percent overweight reported ranks as the highest in eight years.
In contrast, underweight positions in bonds (now regarded as over-valued by a net 75 percent) have reached their highest level since the end of 2013.
The prospect of debt defaults in China has strengthened as the most significant risk on investors’ horizon. It is now cited by 36 percent of respondents.
Even so, investors have reduced their cash buffers. Although still somewhat high, average holdings of 4.5 percent are at their lowest since January.
“Although fund inflows and oil prices argue for near-term consolidation, the case for a summer ‘melt-up’ remains stronger than for a meltdown as high liquidity and low growth force investor cash levels down,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
“Europe has been a cheap way to get equity exposure, but investors no longer see Europe as cheap. This together with some uncertainty on the level of growth may be why optimism is starting to wane,” said Obe Ejikeme, European equity and quantitative strategist.
Japanese equities have declined 7 percent this year, underperforming other global markets. The survey shows global investors treating this as a buying opportunity. A net 21 percent are now overweight, up from a net 7 percent in May.
Moreover, a net 10 percent favor overweighting Japan in preference to all other equity markets in the next year.
These changes come as regional fund managers turn significantly more positive on Japan’s outlook than recently. A net 73 percent expect the country’s economy to strengthen over the next 12 months. This represents a 20 percentage point rise in the space of two months.
Bullishness on the U.S. dollar has re-emerged strongly.
A net 79 percent of respondents now expect the currency to appreciate over the next year. This stands out as one of the strongest readings on this measure in the past 15 years.
In contrast, a net 28 and 48 percent expect the Euro and Japanese yen, respectively, to weaken over the same period.
The European currency’s reading has declined seven percentage points month-on-month. This appears to reflect a combination of the ECB’s dovish stance and some weaker European macro data.