Global investors have regained a strongly bullish stance on the outlook for equity markets in the second half of 2014, according to the BofA Merrill Lynch Fund Manager Survey for July.
A net 61 percent of global asset allocators are now overweight equities. This ranks as the survey’s highest reading on this measure since early 2011 and represents the panel’s second-strongest response ever.
This aggressive positioning for recovery in H2 reflects a significant increase in investors’ inflation expectations. A net 71 percent expect global core CPI to be higher in 12 months, up 13 percentage points since last month. This marks a cyclical high for the survey. Exposure to commodities, an asset class especially sensitive to inflation, has risen to its strongest in more than a year.
A growing number of investors now see inflation moving above trend levels while global growth remains below-trend. Confidence in macroeconomic performance still remains fairly high, though. A net 69 percent forecast that the world economy will strengthen over the next year.
Neither valuation nor tail risks deter fund managers from their optimism. A net 21 percent regard stock markets as overvalued – the survey’s highest reading since 2000. Concerns over potential Chinese debt defaults, “asset manias” and eurozone deflation have all faded since last month. The prospect of geopolitical crises now stands out as the greatest tail risk and threat to financial market stability.
“Improving investor sentiment on global growth, inflation, equities and risk-taking are all testament to a potential macro normalization in the second half. This could eventually feed into a normalization of rates. If growth does pick up, volatility will rise too,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research. “As Europe’s recovery falters the region is becoming a global passenger as investors pin their hopes on growth elsewhere,” said Obe Ejikeme, European equity and quantitative strategist.
Qualms over core Europe
Regional investors now see global re-acceleration as the likeliest source of eurozone growth. Thirty-three percent of respondents point to this driver after a rise of eight percentage points month-on-month. It has overtaken a renewed stimulus program as the panel’s primary driver of regional recovery.
Global survey respondents have further postponed the timing of anticipated quantitative easing by the European Central Bank. Twenty-five percent now expect QE to take place in 2015, up from June’s 15 percent, while only 12 percent see it starting in Q3.
Against this background, the panel has lost conviction towards European equities. Only a net 10 percent would now most favor overweighting the region across the next year, down 11 percentage points from June’s reading.
German equities have lost favor in particular. Only a net 12 percent of regional fund managers would overweight this market over the next 12 months, compared to a net 31 percent last month.
Periphery appetite fading
Investors’ appetite for exposure to the eurozone periphery is also declining. U.S. high-yield has overtaken EU peripheral debt (down nine points month-on-month) as the investment trade that fund managers regard as most crowded.
Confidence in periphery equities has fallen, too. Most notably, only a net 3 percent of regional investors now see Italy as one of the European equity markets they will seek to overweight over the next year, down 16 percentage points from last month. Appetite for Spain has barely weakened, however.
Call for capex
For the seventh month in a row, investors’ call for companies to invest more in capital spending has again reached a record high. The reading now stands at an unprecedented 65 percent and is mirrored by a record net 71 percent judging that companies are under-investing – the highest reading since the survey began asking this question in 2005.
Conversely, those wanting companies to return surplus cash are at their lowest level in five years. Only 18 percent of fund managers are looking to companies to institute buybacks or dividend payments – or to make acquisitions for cash.
