Appetite for Equities Remains High Despite China Concerns
Increasing confidence in the outlook for the U.S. dollar and U.S. equities is offsetting investors’ renewed concerns over China, according to the BofA Merrill Lynch Fund Manager Survey for March.
This month registered the highest level of dollar bullishness in the survey’s history. A net 72 percent of respondents now expect the U.S. currency to appreciate over the next year, a 30-point increase in a month. Bearishness on U.S. stocks has also reversed. A net 5 percent identify the U.S. as the regional market it most wishes to overweight, compared to January’s net 19 percent underweight. The U.S. also offers the best outlook of any region for corporate profits by far, investors believe.
Against this background, investors remain positive on the global economy’s recovery and continue to increase exposure to equity markets. A net 61 percent expects macroeconomic performance around the world to strengthen over the next year, a slight increase on last month’s reading. A net 57 percent of asset allocators are now overweight equities, up from a net 51 percent in the two previous months.
This positive stance offsets a gloomier view of China. Only a net 14 percent of regional investors now expect the Chinese economy to be stronger in a year’s time. This represents one of the sharpest falls in this reading in the survey’s history. Significantly increased fears of a hard landing in China are reflected in a shift out of emerging market equities and into developed markets (mainly the U.S. and Japan).
“Relative U.S. economic outperformance on the back of the housing market’s ongoing improvement and the energy independence story will lead a secular uptrend in the dollar. U.S. equities’ leadership in the ‘Great Rotation’ suggests developed market equities are the likeliest winner in this scenario,” Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, said. “A disconnect between European investors’ increasing optimism about the region and global investors’ continued caution over Europe is also apparent in the survey,” added John Bilton, European investment strategist.
European enthusiasm emerges
European fund managers have adopted a much more positive outlook for the region’s economy. A net 40 percent now expects it to strengthen over the next year. This compares with a net 8 percent two months ago.
This stance is also reflected in expectations of corporate performance. While a net 73 percent judged in January that consensus earnings estimates for European companies were too high, this figure has more than halved to a net 34 percent now. The largest single group of respondents (40 percent) regards estimates as about right, while a net 17 percent expect corporate earnings in the region to improve over the next 12 months. At the end of last year, this reading was consistently negative.
Global investors are taking a more cautious view, which is evident in reduced positioning in European equities. They now have a net 4 percent overweight in the region.
Risk appetite slightly reduced
While global investors’ stance towards equities remains constructive, their risk appetite slipped back slightly this month. The ML Risk & Liquidity Composite Indicator declined by one percentage point month-on-month, its first fall in nine months. Even so, this measure remains well above its average over the past 10 years.
Moreover, asset allocators are more inclined to fund future equity purchases by reducing cash holdings, which remain at a positive 3.8 percent. The March survey found 28 percent would use cash in this way, versus February’s 22 percent. The majority, though, are more inclined to lighten government bond holdings to facilitate fresh buying of equities.
Sectoral shift supports banks
Investors are more positive on Banks than at any time since December 2006, the survey reveals. A net 14 percent have moved to an overweight position this month – up eight percentage points month-on-month.
They are funding this move by lowering positions in Materials stocks (a China proxy affected by lower conviction evident elsewhere in the survey), where a net 17 percent are now underweight. In addition, they have reduced exposure in Telecoms to a net 28 percent underweight. This represents the lowest level of appetite for this sector in more than seven years.
Renewed appetite for Technology exposure is also evident in the panel’s responses. Overweights in the sector have climbed to a net 35 percent, reversing a pattern of declining exposure over the past year.
Fund Manager Survey
An overall total of 254 panelists with US$691 billion of assets under management participated in the survey from 8 March to 14 March. A total of 198 managers, managing US$578 billion, participated in the global survey. A total of 124 managers, managing US$241 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.
BofA Merrill Lynch Global Research
The BofA Merrill Lynch Global Research franchise covers nearly 3,500 stocks and 1,100 credits globally and ranks in the top tier in many external surveys. Most recently, the group was named Top Global Research Firm of 2012 by Institutional Investor magazine; No. 1 in the 2012 Institutional Investor All-Asia survey for the second consecutive year; No. 2 in the 2012 Institutional Investor All-China, All-Europe, All-Japan and All-Latin America surveys; and No. 3 in the 2012 Institutional Investor All-America survey. The group was also named No. 2 in the 2012 Institutional Investor All-America Fixed Income survey and in the 2012 Emerging Markets Equity and Fixed Income survey, covering Emerging Europe, Middle East and Africa.
Additionally, BofA Merrill Lynch Global Research was named the No. 1 Global Broker by Financial Times/StarMine, as well as ranked No. 1 in the U.S. and Europe and No. 2 in Asia. The group was also named No. 1 in Asia and No. 2 in the U.S. in the Wall Street Journal Best on the Street 2012 Analysts Surveys. The group was also the winner of the Emerging Markets magazine’s EM Research Global Award for 2010 and 2011.