Investors are returning to Europe as they retreat from emerging market and Japanese equities, according to the BofA Merrill Lynch Fund Manager Survey for June.
Investor confidence has risen in the past month in spite of market instability and a 2.5 percent fall in world equities over the survey period. A net 56 percent of global investors believe the world economy will strengthen over the coming year, up from a net 48 percent in May. Equity allocations increased. A net 48 percent of asset allocators are overweight equities, compared with a net 41 percent in May.
But while allocations to the eurozone and U.S. rose, investment in global emerging market equities fell to their lowest since December 2008. A net 9 percent of asset allocators are now underweight emerging market equities – the first underweight reading since 2009 and down from a net 3 percent overweight reading last month. Investors now identify a China hard landing as the greatest tail risk – more of a concern than eurozone sovereigns or banks. A net 31 percent of regional fund managers say that China’s economy will weaken in the coming 12 months, compared with a net 8 percent expressing that view in May.
A net 25 percent of the global panel says that emerging markets is the region they would most like to underweight in the coming 12 months – the lowest ever reading. Allocations to commodities have also reached a record low with a net 32 percent of asset allocators holding underweight positions.
“The biggest contrarian play in the market today is assets linked to China. The lows in emerging market equity and commodity allocations suggest the market has over-positioned itself for a shock from China,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “Investors can now see a certain level of stability returning to Europe’s economy and positioning for a recovery has started,” said John Bilton, European investment strategist.
Optimism builds within the eurozone
Seeds of optimism in Europe evident in last month’s survey have flourished. A net 6 percent of global asset allocators are overweight eurozone equities, representing a 14 percentage point swing from May when a net 8 percent were underweight. Last month, a net 13 percent selected the eurozone as the region they would most like to underweight in the coming year. That reading has now fallen to a net 1 percent.
But it’s inside Europe that optimism has risen the most. A net 45 percent of European respondents to the regional survey expect Europe’s economy to strengthen in the coming year, up from a net 24 percent last month. Expectations of European recession in the coming year have fallen sharply.
Equity allocations increased month-on-month across 13 of the 19 sectors assessed in Europe. The greatest positive swings came in telecoms, financial services, banks and chemicals. A net 3 percent of European investors are now overweight Telecoms, compared with a net 24 percent underweight in May. A similar net underweight position was wiped out in financial services over the month. A net 18 percent of respondents are now overweight banks, after the market was net neutral a month ago.
Signs of great rotation from bonds resurface
June’s Fund Manager Survey offers further evidence of the great rotation from bonds to equities. As overall equity allocations rose month-on-month, investors extended their underweight positions in bonds. A net 50 percent of asset allocators say they are underweight bonds in June, up from a net 38 percent in May.
Furthermore, expectation of higher long-term yields has reached the highest level recorded by the survey since 2004. The proportion of the global panel forecasting higher long-term rates in 12 months’ time leapt to a net 81 percent from a net 55 percent last month. Only 4 percent of the panel sees rates falling. At the same time, the proportion forecasting higher short-term rates also soared, up to a net 43 percent from a net 14 percent in May.
“Abenomics” failure become second-largest tail risk
Fear that Abenomics – Japan’s three-pronged stimulus plan – will fail has become investors’ second-largest tail risk after China and interrupted the strong run in Japanese equities. The proportion of asset allocators overweight Japanese equities has fallen to a net 17 percent from May’s seven-year high of a net 31 percent. The proportion of investors viewing Japan as the region they most want to overweight has fallen to a net 16 percent from a net 25 percent. A net 11 percent of regional survey respondents say Japan’s fiscal policy is “too restrictive.”