Investors start 2014 more optimistic about global growth prospects, especially for the U.S. but increasingly for Europe as well, according to the BofA Merrill Lynch Fund Manager Survey for January.
The proportion of investors who believe the global economy will strengthen this year has risen to a net 75 percent from a net 71 percent in December, continuing a trend of rising optimism that started in late 2012.
This optimism is reflected in rising expectations for corporate profits with a net 48 percent looking for an improvement, up from a net 41 percent in December. Among the regions, a net 29 percent of investors choose both the U.S. and Japan with the most favorable prospects for profits. Europe has improved to a net 8 percent expecting profit improvement from a net 4 percent expecting deterioration in the December survey.
As investors’ growth convictions rise, investors’ preference for Global Equities remains strong. A net 55 percent say they’re overweight equities, continuing a trend which started in mid-2012 when a net 4 percent were underweight equities. Confidence in equities is maintained despite a net 7 percent of respondents believing equity markets are overvalued, the highest reading since 2000. The overvaluation view is driven predominantly by the views on U.S. equities where a net 72 percent say stocks are overvalued.
Global growth expectations also raised risk taking capacity. A net 4 percent of investors say they are undertaking a higher than normal level of risk in their portfolios, a near-record high. This rise in risk appetite is reflected in sector allocation where a net 42 percent of respondents are overweight in tech stocks, but a net 32 percent are underweight staples, the lowest in a decade.
“Until corporations reduce high cash levels, investors will run high cash levels and equity corrections will be extremely limited,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.