The gulf between the US and Europe as a preferred investment location remains, although some of the more wildly negative views towards Europe have eased, according to the BofA Merrill Lynch Survey of Fund Managers for January.
“A net 56 percent of the global panel believes that the outlook for corporate profits is more favourable in the US than any other region, up from a net 50 percent in December. A net 70 percent say the profit outlook for the Eurozone is the least favourable of all regions, compared with a net 72 percent a month ago,” the survey’s findings revealed.
Asset allocators have further increased their exposure to US equities. A net 28 percent are overweight US equities, up from a net 23 percent in December. A net 31 percent remain underweight eurozone equities, an improvement from a net 35 percent a month ago but the second-worst reading on record.
Global investors have started 2012 with a reawakened sense of optimism towards the global economy and greater appetite for risk.
The global survey of 214 institutional investors shows far fewer predicting a global slowdown. Only a net 3 percent believe the world economy will weaken in the coming 12 months down from a net 27 percent in December – the biggest one-month improvement in the growth outlook since May 2009.
Many investors are showing more appetite to take risk. BofA Merrill Lynch’s Composite Risk and Liquidity Indicator is the highest since July 2011, before the sovereign debt crisis fully emerged. Cash levels have fallen to their lowest levels since July 2011. Cash now makes up, on average, 4.4 percent of a portfolio, down from 4.9 percent in December. The proportion of investors taking lower than normal levels of risk has improved to a net 33 percent of the panel, compared to a net 42 percent in December.
One concern that investors have highlighted is geopolitical risk. The proportion of respondents viewing geopolitical risk as “above normal” has jumped to 69 percent from 48 percent last month. This has, in the past, been correlated with a spike in the oil price.
“Investors are tip-toeing rather than hurtling toward higher risk exposure; the U.S. market and high quality cyclical sectors, such as energy and tech, have been the main beneficiaries of lower cash holdings,” Michael Hartnett, Chief Global Equity strategist at BofA Merrill Lynch Global Research, said.
“Despite improvement in global and European growth expectations asset allocators remain deeply skeptical towards European equities, especially banks,” Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research, said.
Fears of a global corporate profit slowdown still exist but have receded in the past month. While a net 21 percent of the panel still expects profits worldwide to deteriorate in 2012, that’s sharply lower than the net 41 percent taking the view in December. The proportion of the panel expecting corporate earnings growth to be under 10 percent has fallen to a net 42 percent from a net 60 percent.
Investors are returning to the view that corporate need to invest more. A net 55% of respondents said that corporates were under investing, the highest reading in 10 months. A net 37 percent of the panel believes that corporate are “under leveraged,” up from a net 31 percent in December.
Technology has regained its status as the most favoured global sector, highlighting the uptick in risk appetite after the defensive positioning at the end of 2011. The net percentage of investors’ overweight technology rose to 39 from a net 31 percent in December, overtaking Pharmaceuticals.
US fund managers are returning to banks while Europeans continue to reject them. The proportion of US fund managers’ underweight banks has fallen to a net 16 percent from 32 percent last month. European fund managers have extended their underweights’ – a net 50 percent are underweight banks.
Hedge Funds reduced their leverage this month to the lowest level since August 2010. The weighted average ratio of gross asset to capital has fallen to 1.22 from 1.41 in December. This fall follows six months in which leverage had remained high in spite of wider market volatility.