Growth Expectations Ease While Prospects of QE Return
Investors have scaled back both risk-taking and their expectations for global growth after concerns about European Union (EU) economies resurfaced, according to the BofA Merrill Lynch Survey of Fund Managers for April.
Investors have increased cash positions significantly since March. A net 24 percent of global asset allocators are overweight cash in April, up from a net 6 percent one month ago. Average cash balances rose to 4.7 percent of global portfolios, an increase from 4.2 percent in March.
A net 26 percent of asset allocators are overweight equities, down from a net 33 percent in March. Investors have increased allocations to pharmaceuticals, a counter-cyclical sector while reducing positions in materials, a cyclical sector.
Concerns over European state finances have risen sharply. A 54 percent of the panel says that EU sovereign debt funding is the number one tail risk, up from a 38 percent in March. A net 63 percent of the panel predicts that Spain is likely to provide a negative surprise in 2012, up from a net 50 percent last month.
But France is close behind Spain, with a net 56 percent of the panel saying France could provide a negative surprise, up from a net 52 percent. Intriguingly, the panel is evenly split in predicting the outcome of France’s presidential election, with 40 percent expecting a win for Nicolas Sarkozy and 39 percent Francois Hollande.
“Investors have moved to a more neutral position after positive shifts in sentiment and risk taking in the first quarter. We believe investors will retain a sense of caution throughout the second quarter,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research.
“The survey highlights that while investors’ primary concern in the EU is Spain’s economy, the outcome of and uncertainty around France’s elections is also figuring high in their decision making,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
Global growth expectations ease while prospects of QE return
The prospect of further bad news about EU sovereign funding has ended four successive months of increasing optimism over global growth and reawakened interest in quantitative easing (QE).
A net 20 percent of the panel says that the global economy will strengthen in the coming year, down from a net 28 percent in March – sentiment had improved steadily from November, when a net 29 percent predicted economic deterioration. A net 3 percent of the global investor panel expects corporate profits will worsen in the next 12 months, compared with a net 6 percent predicting an improvement in profits last month.
Investors in Europe have turned bearish, with a net 24 percent predicting the region’s economy will deteriorate in the coming 12 months, according to the BofA Merrill Lynch Regional Fund Manager Survey. A month ago, European investors were evenly split on the economic outlook.
Amid reduced optimism, investors are predicting more QE from both the U.S. Federal Reserve (Fed) and the European Central Bank (ECB). Only 36 percent of the global panel expects no further QE from the Fed, down from 47 percent in March.
Meanwhile, 44 percent of investors are expecting ECB to engage in more direct large scale QE before the end of the third quarter, up from 34 percent taking that view a month ago.
U.S. grass looks greener from outside; China resurgent?
Many global investors have increased allocations to U.S. equities in April or expressed an intention to do so. A net 27 percent of global asset allocators are overweight U.S. equities in April, up from a net 14 percent in March. The U.S. is also the region that net 18 percent of the panel would like to overweight – only a net 2 percent named the U.S. as their preferred overweight last month.
Investors within the U.S. are less optimistic, however. A net 8 percent of U.S.-based investors say the country’s economy will get stronger in the coming year, down from a net 29 percent in March. A net 8 percent predicts corporate earnings will fall – last month, U.S. investors were evenly split on whether earnings would improve or deteriorate.
One potential point of economic optimism from April’s survey is China. For the first time since November 2010, investors are net positive, with a net 4 percent of the regional panel expecting China’s growth to improve in the coming year, compared with 9 percent predicting deterioration a month ago. In contrast, global asset allocators reduced their emerging market overweights from March to April.