Risk Appetite Declines in Response
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.
Fund Manager SurveyAn overall total of 220 panelists with US$640
billion of assets under management participated in the survey from
3 October to 9 October 2014. A total of 176 managers, managing
US$508 billion, participated in the global survey. A total of 103
managers, managing US$264 billion, participated in the regional
surveys. The survey was conducted by BofA Merrill Lynch Global
Research with the help of market research company TNS. Through its
international network in more than 50 countries, TNS provides
market information services in over 80 countries to national and
multi-national organizations. It is ranked as the fourth-largest
market information group in the world.
BofA Merrill Lynch Global ResearchThe BofA Merrill Lynch Global
Research franchise covers more than 3,500 stocks and 1,180 credits
globally and ranks in the top tier in many external surveys. Most
recently, the group was named Top Global Research Firm of 2013 by
Institutional Investor magazine; No. 1 in the 2014 Institutional
Investor All-Europe survey; No. 1 in the 2014 Institutional
Investor All-Asia survey for the fourth consecutive year; No. 1 in
the Institutional Investor 2014 Emerging EMEA Survey; No. 2 in the
2014 Institutional Investor All-America survey; and No. 2 in the
2013 All-China survey. The group was also named No. 2 in the 2014
Institutional Investor All-Europe Fixed Income Research survey; and
No. 2 in the 2014 All-America Fixed Income survey for the third
consecutive year.
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