Investor sentiment rises sharply in July

Investor sentiment has risen sharply from the lows of July and fund managers have increased allocations to equities, real estate and commodities, according to the BofA Merrill Lynch Survey of Fund Managers for August.

A net 15 percent of the 173 panelists participating in the global survey believe that world economy will get stronger in the coming 12 months. This represents a monthly swing of 28 percentage points, the largest leap in confidence since April to May 2009, when the world emerged from the credit crunch. In July, a net 13 percent said the economy would weaken. BofA Merrill Lynch’s Growth Expectations Composite has risen to 49 from 37 in July.

Fears about the outlook for corporate profits have reduced since July. A net 21 percent of the panel expects profits to deteriorate in the coming year, down from a net 38 percent a month ago.

The fresh optimism comes amid growing expectations of intervention by the European Central Bank (ECB). The proportion of the panel ruling out more quantitative easing by the ECB has halved to 9 percent, while 38 percent expect the ECB to act during the third quarter (up from 29 percent in July). China’s economy is also providing optimism with a net 14 percent of the regional panel saying China’s economy will improve – the most positive reading since November 2010.

“August’s surge in confidence seems to be more a triumph of policy projection and potential than positive economic data. As indicated by the survey, the risk is now that inaction by policy makers would lead to a negative reaction in global markets,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research. “Investor positioning does not indicate a major inflection point in the investment cycle. Bond allocations remain high and investors are shunning the most cyclical equity sectors,” Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research, said.

Having turned their backs on Europe, especially the eurozone, for much of 2012 investors are becoming far less bearish on the region. Significantly, there are more investors wanting to underweight US equities than eurozone equities.

A net five percent of investors want to underweight eurozone equities – down from a net 18 percent in July. A net 9 percent wants to underweight the US, compared with a net 6 percent looking to overweight US equities in July. Fewer investors are at the same time saying that EU sovereign debt is the largest tail risk while more are nervous about the US “fiscal cliff.”

Actual allocations to Europe have risen. A net 13 percent of asset allocators say they are currently overweight eurozone equities, down from a net 26 percent in July. Fewer investors within Europe are concerned about the regional economy. A net 23 percent of the regional panel expects the economy to weaken in the coming year, down from a net 33 percent a month ago.
Investors have put money to work in a range of asset classes as their appetite for risk has picked up, albeit modestly compared to the sharp improvement in economic sentiment.

Allocations to real estate have moved into overweight territory for only the second time since 2007 and have reached their highest level since January 2007. A net 5 percent of asset allocators are overweight the asset class after a net 3 percent reported being underweight last month. A net 12 percent of asset allocators are overweight equities compared with a net 3 percent being underweight the asset class last month. The proportion of investors’ underweight commodities fell to a net 2 percent from a net 13 percent in July.

BofA Merrill Lynch’s Composite Indicator for Risk and Liquidity rose to 35 from 31 in July. Fund managers have reduced cash positions slightly to an average of 4.7 percent of portfolios, down by 0.2 percent. A net 3 percent of the panel describes trading conditions as good. The same number assessed conditions as “poor” in July.

Investors are putting greater pressure on corporates to return cash to shareholders. A net 43 of the panel says that share buybacks and dividends is the most important use of cash flow, ahead of capital spending and strengthening balance sheets. This is the highest reading since November 2010 and up from a net 37 percent in July.

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