Investors Increase Cash Positions and Scale Back GEM Equity Exposure

  • Fears Growing Over China, but Europe and U.S. Holding Firm

Growing fears of a hard landing for China’s economy have further marginalized emerging market equities. But investors have sent a clear signal that sentiment toward developed world equities remains strong, according to the BofA Merrill Lynch Fund Manager Survey for February.

A growing proportion of investors – 46 percent in February – say that a China hard landing and commodity collapse represents the biggest tail risk to the global economy. That figure compares with 37 percent in January and 26 percent in December.

Belief in global economic growth has moderated. A net 56 percent expects the global economy to strengthen in the coming 12 months, down 19 percentage points from a net 75 percent last month. Global equity allocations are down; a net 45 percent of asset allocators say they are overweight equities, down from a net 55 percent in January. Average cash balances have increased to their highest level since July 2012 of 4.8 percent of portfolios, up from 4.5 percent.

But regional data shows that concerns are focused on Global Emerging Markets (GEM), while optimism towards Europe and the U.S. remains strong. Allocations to GEM have reached a record low with a net 29 percent of asset allocators underweight the region. At the same time, a record net 40 percent of the global investor panel says that the eurozone is the region they most would like to overweight in the coming 12 months. U.S. equities are becoming more popular – a net 11 percent of asset allocators are overweight the U.S., up from a net 5 percent a month ago.

“High cash levels, at 4.8 percent of portfolios, are sending an unambiguous ‘buy’ signal for risk assets,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

“Investors remain firmly bullish towards developed markets and Europe in particular. But we would caution that current valuations in Europe already fully price in the region’s growth outlook,” said John Bilton, European investment strategist.

Cash stand-off: Corporates vs. investors

While cash levels accumulate in investors’ portfolios, the Fund Manager Survey shows a new record number of investors demanding corporates put their cash to work in the real economy.

The proportion of investors saying that companies are underinvesting has climbed to 69 percent, thereby eclipsing the record set one month ago of 67 percent. Furthermore the gap, or spread, between investors wanting corporate to increase capital expenditure (capex) rather than return cash to shareholders remains at a record high. Fifty-eight percent of investors want to see more capex, while 25 percent opt for dividends and buybacks – a spread of 33 percentage points.

At the same time, nearly eight out of 10 investors are predicting below-trend growth over the coming year. The survey data indicates that investors will be more likely to commit cash when they see capex rising and stimulating economic growth.

Trading places in investors’ hearts: Banks and emerging markets

In the wake of the global financial crisis, banks were unloved and GEM were portfolio darlings. The reversal in sentiment between these two investments appears complete this month.

While allocations to GEM reached a record low, allocations to banks by respondents to the global survey have reached a record high. A net 28 percent said they are overweight banks, a significant swing since January when a net 16 percent were overweight.

One glimmer of hope for GEM is that the number of investors seeking to underweight the region in the coming year has eased slightly. A net 24 percent of global investors would like to underweight GEM in the next 12 months, down from a net 28 percent in January.

European equities at fever pitch

Optimism towards Europe has reached new highs. A net 40 percent of investors say that Europe is the region they most want to overweight. Europe has ranked as the most preferred region for six months. Belief continues to grow in Europe’s profit outlook. A net 12 percent of the global panel says that Europe is the region in which the profit outlook appears the most favorable, up from a net 8 percent a month ago.

Within Europe, a net 70 percent of respondents to the regional survey expect better profits in the year ahead – up from a net 59 percent last month. The number of European investors expecting double-digit earnings growth also increased.

Fund Manager Survey
An overall total of 222 panelists with US$591 billion of assets under management participated in the survey from 7 February to 13 February 2014. A total of 175 managers, managing US$456 billion, participated in the global survey. A total of 110 managers, managing US$249 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.


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