Overwhelming majority of 72 per cent of European investors expect recession in Europe, according to the BofA Merrill Lynch Survey of Fund Managers for November.
“Global investors are seeking respite from troubles in the eurozone by turning to US and emerging market equities,” the survey added.
Globally, investors have slightly increased their exposure to equities since October’s survey. A net 5 percent of the panel is underweight equities, down from a net 7 percent a month ago. The proportion of investors’ overweight U.S. equities rose sharply to a net 20 percent from a net 6 percent in October.
Global emerging markets bounced back after a weak October. A net 27 percent of investors are overweight the region, up from a net 9 percent last month. The eurozone remains the least popular region, but the proportion of investors’ underweight eurozone equities ticked down just one percentage point to a net 30 percent.
Gloom within the eurozone has intensified. The proportion of Europeans forecasting regional recession has almost doubled. A net 72 percent of European respondents to the regional survey believe Europe will experience recession in the coming 12 months, up from a net 37 percent in October.
Fears of a global recession have eased. A net 31 percent of investors expect the world economy to avoid a recession, up from a net 25 percent last month.
“Investors are showing belief in emerging market growth and U.S. resilience, which is a key to retaining positive global sentiment,” said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Research. Gary Baker, head of European Equities strategy at BofA Merrill Lynch Research, added, “European growth concerns are more intense but sentiment looks to be close to rock bottom – unless Europe’s problems spread to the rest of the world.”
Behind the increased exposure to emerging market equities is increased faith in the resilience of China’s economy. In a new question this month, the survey asked global investors if they see China’s economy experiencing a hard or soft landing in 2012.
More than three-quarters of the panel (78 percent) expect a soft landing, with China delivering better than 7 percent growth during the year. The proportion of regional investors believing that China’s economy will weaken in the coming year has fallen to a net 25 percent from a net 47 percent in October.
Fears of higher inflation, which have cast a shadow over emerging markets in recent months, have fallen away since September. A net 59 percent of respondents from Asia Pacific (ex-Japan) to the regional survey expect inflation to fall in the coming year, compared with a net 14 percent predicting higher inflation in September.
Investors’ belief in emerging markets is reflected in increased allocations to commodities and commodity-related equities. Global asset allocators have moved from underweight commodities in October to neutral this month. The biggest positive swings in equity allocations were in energy and materials. A net 1 percent of allocators are underweight materials, down from a net 9 percent in October. The proportion of allocators’ overweight energy stocks stands at a net 20 percent, up from a net 11 percent a month ago.
Emerging markets and the US are the regions that investors feel most positively about. A net 28 percent say they would like to overweight emerging market equities more than any other region, while a net 18 percent opt for the US. A net 29 percent would most want to underweight the eurozone.
For the first time since March 2009, investors predict that short-term rates will fall in the next 12 months. A net 5 percent of the panel say rates will be lower a year from now, compared with a net 9 percent predicting higher rates last month – a potential signal that as concerns about inflation in emerging markets erode, the question of deflation could be on investors’ minds.
Despite more positive sentiment towards U.S. equities this month, a small majority of the panel expect the U.S. to receive a further debt rating downgrade. Fifty-three percent of the global panel believes another downgrade could take place before the end of 2013 – with more than one-third (36 percent) predicting a change in 2012.