Investor optimism over the global economic recovery and corporate profits has been dented as the tail risk associated with the U.S. economy has escalated, though sentiment towards Europe has improved, according to the BofA Merrill Lynch Fund Manager Survey for October. The survey taken from October 4 to October 10 showed that the number of investors believing the global economy will strengthen had fallen to a net 54 percent from a net 69 percent in September, albeit still at historically strong levels. A net 71 percent expect the economic growth to remain “below trend” in the coming 12 months, up from a net 61 percent a month ago. Concern about U.S. fiscal tightening is now the number one tail risk for 24 percent of the panel, up from only 6 percent in September. Expectations for a recovery in corporate profits have also fallen. Last month, a net 41 percent said they expected corporate profits worldwide would improve in the following 12 months – that figure has tumbled to a net 28 percent in October. A net 18 percent believes that corporate profit margins will decrease in the coming year, up from a net 11 percent a month ago. Asset allocators have scaled back their equity holdings. A net 49 percent of global asset allocators are overweight equities, down from a net 60 percent in September. Over the past month, investors have reduced their positions in eight out of the 11 sectors monitored by the survey. Last month, a net 9 percent of the panel remained overweight U.S. equities, and this month, that measure has dropped to zero percent. At the same time, investors have shifted back towards fixed income, scaling back their underweight positions in bonds and portfolio cash levels rose. “Events in Washington clearly caused investors to shift back towards their benchmarks, but asset price gains can still be driven by high cash levels,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “Strong flows into Europe would call for a touch of near-term caution, but solid macro momentum in the region suggests that any dips in EU equity markets would be enthusiastically bought,” said John Bilton, European investment strategist.
Rising conviction about European equitiesEurope has been able to avoid the downward shift in global sentiment with equity allocations reaching a six-year high. A net 46 percent of asset allocators are overweight European equities, up from a net 36 percent September and representing the highest reading since 2007. Global investors’ outlook for European corporate profits has continued to rise uninterrupted by events in Washington. It is now at its most positive level since September 2007. A net 10 percent of the panel says the eurozone is the region with the most favorable outlook, up from two months ago when a net 5 percent forecast falling profits. Positivity towards corporate Europe is also evident within the region. In August, a net 55 percent of European respondents to the regional survey said double-digit growth was unlikely in the following year. This month, a net 6 percent says that double-digit earnings growth is likely – a two-month swing of 61 net percentage points. Japanese equities have also resisted the global trend in October to record a second successive month of improvement. A net 30 percent of global asset allocators are overweight the region, up from a net 22 percent in September. Emerging market confidence starts to rebuild Investors and asset allocators have increased allocations towards global emerging market equities and have indicated in October’s survey that they see value in the region. The signals towards global emerging markets are not universally positive, however. Asset allocators scaled back their underweight positions. A net 10 percent of the panel was underweight emerging markets equities in October, improved from a net 18 percent underweight a month ago. On average, a net 26 percent of investors have been overweight the region. A net 38 percent of the global respondents say that emerging markets equities are the most undervalued of all the regions – in contrast, a net 63 percent says the U.S. is the most overvalued region. The amount of investors naming emerging markets as the region they most want to underweight continued to fall.
At the same time, however, the outlook for China’s economy worsened. A net 5 percent of regional fund managers expect the Chinese economy to strengthen in the coming year, down from a net 28 percent in September. And asset allocators further reduced their exposure to commodities – an important proxy for emerging market sentiment. A net 28 percent of asset allocators are underweight commodities, compared with a net 16 percent in September.Survey of Fund ManagersAn overall total of 183 panelists with US$643 billion of assets under management participated in the survey from October 4 to October 10, 2013. A total of 183 managers, managing US$500 billion, participated in the global survey. A total of 118 managers, managing US$291 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch 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 nearly 3,500 stocks and over 1,100 credits globally and ranks in the top tier in many external surveys. Most recently, the group was named Top Global Research Firm of 2012 by Institutional Investor magazine; No. 1 in the 2013 Institutional Investor All-Asia survey for the third consecutive year; No. 1 in the Institutional Investor 2013 Emerging Market & Fixed Income Survey; No. 2 in the 2013 Institutional Investor All-America survey; No. 2 in the All-Japan survey for the second consecutive year; No. 2 in the 2013 All-Latin America survey; No. 2 in the 2012 All-China survey; and No. 3 in the 2013 Institutional Investor All-Europe survey. The group was also named No. 2 in the 2013 Institutional Investor All-America Fixed Income survey for the second consecutive year; and No. 3 in the 2013 All-Europe Fixed Income Research survey.
Additionally, BofA Merrill Lynch Global Research was named the No. 1 Global Broker by Financial Times/StarMine, as well as ranked No. 1 in the U.S. and Europe and No. 2 in Asia. The group was also named No. 1 in Asia and No. 2 in the U.S. in the Wall Street Journal Best on the Street 2012 Analysts Surveys.Bank of AmericaBank of America is one of the world's largest financial institutions, serving individual consumers, small- and middle-market businesses and large corporations with a full range of banking, investing, asset management and other financial and risk management products and services. We serve approximately 51 million consumer and small business relationships with approximately 5,200 retail banking offices and approximately 16,200 ATMs and award winning online banking with 30 million active users and more than 14 million mobile users. Bank of America is among the world's leading wealth management companies and is a global leader in corporate and investment banking and trading across a broad range of asset classes, serving corporations, governments, institutions and individuals around the world. Bank of America offers industry-leading support to approximately 3 million small business owners through a suite of innovative, easy-to-use online products and services. The company serves clients through operations in more than 40 countries. Bank of America Corporation stock (NYSE: BAC) is listed on the New York Stock Exchange. Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., all of which are registered broker-dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp. are registered as futures commission merchants with the CFTC and are members of the NFA. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured * May Lose Value * Are Not Bank Guaranteed.