Nine-year High in Global Sentiment Towards
Japanese Equities
Global investors have a restored appetite for risk amid greater
optimism over the outlook for profits and the economy, according to
the BofA Merrill Lynch Fund Manager Survey for November.
A net 47 percent of the global panel expects the economy to
strengthen in the year ahead, a rise from a net 33 percent in
October. Investors have expressed similar positivity over profits –
a net 42 percent say that global corporate profits will improve in
the coming year, up from a net 27 percent last month.
Investors have signaled that their optimism has been translating
into action over recent weeks. In October, a net 16 percent of the
panel said they were taking lower than normal levels of risk. This
month, a net 2 percent are taking above-normal risk. The proportion
taking out protection against a sharp fall in equities in the
coming three months has fallen to a net -39 percent from a net -35
percent.
Asset allocators have shifted out of cash and increased their
allocations to equities. A net 13 percent of respondents to the
global survey are overweight cash in November, down from a net 27
percent in October. The proportion of asset allocators overweight
equities has risen by 12 percentage points to a net 46 percent.
Hedge funds have also increased their net allocations to equities –
43 percent of surveyed hedge funds are net long equities, up from
35 percent one month ago. Japan is the region most in favor, while
investors are sending mixed signals about appetite towards Europe.
Real Estate allocations have reached the highest overweight
recorded since its inclusion in the survey in 2006.
“Deflation might be in the back of investors’ minds, but taking
on risk, especially in equities, in Japan and in the dollar is at
the forefront of their thinking,” said Michael Hartnett, chief
investment strategist at BofA Merrill Lynch Research. “European
stocks were recently boosted by the best earnings season in three
years. However concerns over longevity of growth and deflation
continue. Three wise themes of yield, quality, and large cap are
the best places to hide in European stocks,” said Manish Kabra,
European equity and quantitative strategist.
Japan – most positive outlook since 2005
Japanese equities have seen a second big pick up in allocations
in consecutive months, and the trend is likely to continue. A net
45 percent of global asset allocators are overweight Japan, a rise
from a net 32 percent in October and a net 23 percent in
September.
Japan is also the most favored region for the coming year. A net
27 percent of the investor panel says that Japan is the region they
are most likely to overweight in the next 12 months. This
represents a nine-year high and a rise from a net 14 percent in
October.
Conviction over Japan appears to be underpinned by a belief in
the profit outlook and a view that the country’s stocks are
undervalued. A net 26 percent of respondents identified Japan as
having the most favorable profit outlook for the year ahead – a
rise of 10 percentage points month-on-month. And a net 17 percent
say that Japanese equities are the most undervalued in the
world.
As they assess Japan’s outlook, investors are weighing up the
prospect of the yen suffering more depreciation in the coming year
than the euro or dollar. A net 57 percent of the global panel
expects the yen to fall in value on a trade-weighted basis. This,
however, could make Japanese exporters attractive. The regional
survey highlights how three of Japan’s largest exporting sectors –
technology, industrials and autos – are the most favored by local
investors.
Risk appetite overcomes fear of tail-risks
Investors have marked out deflation as the biggest risk to the
market’s upward trajectory. Twenty-nine percent of the global panel
said that eurozone deflation is the biggest “tail risk,” ahead of
geopolitical crisis (21 percent). Furthermore, asked in a new
question what is the greatest risk in 2015, 71 percent opted for
deflation over inflation.
But while deflation is a concern, they don’t appear to see it as
the most likely outcome. A net 35 percent of investors have said
that they expect global core inflation to pick up over the year
ahead.
Confused signals over European equities and concern over
France
Investors appear unsure how to treat European equities. Global
asset allocators increased their moderate overweight positions
slightly this month – a net 8 percent are now overweight the
region. But investors have also indicated that they would like to
underweight the region in the coming 12 months. Meanwhile,
investors inside Europe have indicated optimism over the region’s
prospects for improving growth and profits – a net 62 percent of
the regional respondents forecast improving earnings per share for
the coming year, up from a net 32 percent in October. But, they
have increased cash holdings in the past month and have indicated a
growing appetite to underweight France and scale back holdings in
Italy.
Fund Manager SurveyAn overall total of 214 panelists with US$569
billion of assets under management participated in the survey from
7 November to 13 November 2014. A total of 166 managers, managing
US$431 billion, participated in the global survey. A total of 111
managers, managing US$252 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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