Investor confidence in global economic growth remains high even as expectations of higher short-term rates increase, according to the BofA Merrill Lynch Fund Manager Survey for April.
The survey, taken between April 4 and April 10, 2014 showed that the number of investors believing the global economy will grow over the next 12 months was steady at a bullish net 62 percent, unchanged from March and higher than the 56 percent in February. That view supports expectations for profits – a net 44 percent of investors believe profits will improve over the next 12 months, up from 40 percent in March and the same as in February.
However, expectations of higher short-term rates are growing with a net 66 percent believing short rates will rise over the next 12 months, up from 55 percent in both March and February and the highest in three years. This expectation of normalizing monetary policies, though, hasn’t changed sentiment on long-term rates much – a net 72 percent believes they’ll be higher in 12 months, down slightly from 74 percent in March and 73 percent in February.
Taken together, expectations for a steeper yield curve are falling away. A net 22 percent of investors are expecting a steepening compared with 39 percent in March and 42 percent in February.
There was a big change in sentiment among investors when choosing between value and growth stocks. In April, a net 40 percent believed value stocks will outperform growth stocks over the next 12 months, more than triple the level in March and an all-time high.
The preference for value might offer one clue to the recent sell-off in technology and biotech stocks.
“Recent market volatility has led investors to ‘taper’ their extreme bullishness on U.S. growth-plays and extreme bearishness on emerging markets,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
Seeking alternative markets
Regionally, a net 66 percent of global fund managers believe the U.S. is still the most over-valued equity market, little changed from March and February. That has many looking again at emerging markets – a net 55 percent think these are undervalued, up from 49 percent in March and the highest reading ever. In addition, only a net 2 percent would like to underweight emerging markets, down sharply from 21 percent in March.
Fund managers are taking a more guarded view of assets favored in recent years. Topping the list of crowded trades are Long U.S. High-Yield bonds at 22 percent, a notable jump on the 13 percent in March. Also, long peripheral debt was cited as a crowded trade by 19 percent of respondents, up from 16 percent in March.
“After two years of cyclical outperformance in Europe, some of the exuberance we see in investor sentiment and positioning suggests a rotation into more defensive stocks and sectors may be imminent,” said Obe Ejikeme, European Equity and Quantitative strategist.
Abenomics effect wanes
In Japan, the boost provided by the launch of “Abenomics” over a year ago continues to wane. Only a net 13 percent of investors are still overweight Japanese equities, down from 16 percent in March and 30 percent in February. Similarly, a net 16 percent have a favorable outlook for Japanese profits, down from 18 percent in March and 28 percent in February while perceptions of their quality and volatility turn for the worse.