Strong global economic sentiment for 2014, according to BofA Merrill Lynch

20 December 2013   Category: News, Asia, Global   By Asia Asset Management

Investors enter 2014 optimistic about the global economy and outlook for Japanese and European equities, according to the BofA Merrill Lynch Fund Manager Survey for December.

The proportion of investors believing the global economy will strengthen in the year ahead has risen to a net 71% from a net 67% in November. Conviction in the global economy is far stronger than 12 months ago when a net 40% of the panel predicted it would strengthen.

Similarly, the outlook for profits has ticked upwards month-on-month and is far stronger than the end of 2012. A net 41% believes global profits will improve over the coming year, compared with a net 11% taking that view a year ago. Fifty-five percent of investors say that they want corporations to prioritise capital expenditure over other uses of cash flow. That represents a survey high and an increase from 53% in November and 45% 12 months ago.

Preference for equities over bonds remains at historically high levels. The spread between equity overweights and bond underweights stood at 118 percentage points in December, compared with 76 points one year ago and just 19 points in July 2012.

Investors demonstrated a strong preference for Europe and Japan. Global investors have increased overweight positions in Japanese and eurozone equities in the past month and indicated appetite for more, while domestic investors in each region have become more optimistic.

“Weakness in the US dollar next year is the biggest threat to positioning given a consensus to go long Japanese and European cyclicals,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “Belief in the European recovery has reached a stretched level, leaving markets vulnerable to profit taking as portfolio managers seek uncrowded alternatives,” said John Bilton, European investment strategist.

Rising conviction about Japan and eurozone

Global investors have increased allocations to Japan and Europe and suggested that they will continue to do so into 2014. A net 34% of asset allocators are overweight Japanese equities this month, up significantly from a net 24% in November. Furthermore, a net 22% of the investor panel says that Japan is the region they most would like to overweight.

Sentiment is also positive among domestic investors. A net 44% of Japanese investors responding to the regional survey expect the country’s economy to strengthen in 2014, up from a net 27% last month. A net 33% believe that Japanese equities are undervalued.

Positivity towards Europe and within Europe is strong. Allocations to eurozone equities have risen slightly from existing high levels. A net 43% of asset allocators are overweight eurozone equities, up two percentage points month-on-month. A net 24% of the panel says that the eurozone is the region they most want to overweight – although this is down month-on-month.

Investors within Europe are increasingly bullish about the region’s outlook. A net 83% of respondents to the regional survey believe the European economy will strengthen in 2014, up from a net 74% in November. A net 83% say recession in the region is unlikely. A net 64% expect corporate profits to improve in 2014.

Banks popular – commodities unpopular

Investors and asset allocators have increased allocations towards banks over the past month. The net percentage of the global panel overweight banks rose to a net 17% from a net 12% in November. European investors have moved particularly sharply into this maligned sector. A net 22% of European respondents said they are overweight banks this month, compared with an equal number overweight and underweight in November.

Commodities and related stocks remain deeply unpopular. A net 31% of asset allocators are underweight commodities, up seven percentage points month-on-month. A net 14% are underweight energy stocks, a monthly rise of three percentage points.

More cash on the sidelines

Average cash balances stand at 4.5% of portfolios, historically a level that is a positive signal for equities. A net 16% of asset allocators say they are overweight cash, up from a net 9% in November. The higher cash levels coincide with expectations of higher interest rates and a belief by three-quarters of the panel that the Fed will introduce tapering in the first quarter of 2014.

The survey

An overall total of 237 panellists with US$655 billion of assets under management participated in the survey from 6 December to 12 December 2013. A total of 188 managers, managing US$530 billion, participated in the global survey. A total of 119 managers, managing US$273 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS.