Rising equity prices fail to lift investor gloom

Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research
Investor confidence has weakened further, led by a sharp decline in expectations of corporate profit growth, according to the BofA Merrill Lynch Survey of Fund Managers for July.

“Rising equity prices have failed to lift investor gloom and we still see a quarter of investors expecting a global recession while hopes for further policy easing have been delayed,” Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research, said.

BofA Merrill Lynch’s Growth Expectations Composite has fallen to 37 in July from 43 in June and 54 in May. A severely deteriorating outlook for profits is driving the fall in confidence. A net 38 percent of investors say corporate profits will worsen in the coming 12 months – compared with a net 19 percent a month ago. It represents a 39 percentage point drop since May. The two month drop is similar to the fall in confidence in summer 2011 as the sovereign debt crisis took shape.

Belief that corporates can grow profits by 10 percent or more is at its lowest point since April 2009. A net 69 percent of the panel expect corporates profit growth to be less than 10 percent in the coming year. A net 58 percent say operating margins will decrease, up from a net 41 percent in June.

Both the broader macro-economic outlook and risk appetite have stabilized, however, after two months of sharp deterioration. A net 13 percent of the panel say that the world economy will weaken in the coming year, a drop of 2 percentage points after a fall of 26 points from May to June. BofA Merrill Lynch’s Composite Indicator for Risk and Liquidity rose slightly month-on-month as investors reduced average cash holdings in portfolios to back under 5 percent. Most investors expect further quantitative easing, but few expect this to happen in the third quarter.

“July’s survey highlights that corporate profit expectations have to catch up with the downgrade in the economic outlook we have seen the past two months,” Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research, said.

Investors’ perception of risk in the eurozone has shifted this month with fears falling about the periphery but rising about Europe’s core. The proportion of respondents who see the risk of a negative shock around Germany’s economy has more than tripled to 32 percent, up from 10 percent in June. Concern over France has risen with a majority of investors (55 percent) believing the French economy could present a negative surprise this year.

Fears that Spain or Portugal could spring a negative surprise have fallen while expectation is growing of good news from Ireland – 32 percent hope for a positive surprise from Ireland this year, up from 16 percent in June. Confidence in Greece has fallen, however. The proportion saying Greece will avoid exiting the euro fell to 37 percent from 44 percent.

European investors see an increasing risk of recession and also concur with rising worldwide concerns about corporate profits. A net 61 percent of European Regional Survey panelists predict worsening corporate earnings, double June’s reading.

Technology has been a favourite sector for global investors for the past three years, but U.S. investors have signaled a possible bursting of the IT bubble. Overall, a net 22 percent of U.S. respondents to the Regional Survey are overweight technology – a sharp fall from a net 41 percent a month ago. Within those figures 19 percent of the panel are underweight IT, up from 9 percent in June.

Global investors have also scaled back Technology holdings. A net 32 percent are overweight technology this month, down from a net 41 percent in June.

US equities have declined in popularity as global asset allocators have cast their net around the world. A net 14 percent of respondents are overweight US equities, down from a net 31 percent last month. At the same time, asset allocators have reduced their underweight in eurozone, UK and Japanese equities.

Despite commodities as an asset class losing popularity this month, investors see gold as fairly valued and oil as undervalued. The proportion of panelists saying gold is overvalued fell from 10 percent to 1 percent. A net 12 percent say that oil is undervalued, compared with it being viewed as fairly valued in June. The last time gold was seen as fairly valued was when it was priced at about $1,000 per ounce. The last time oil was seen as undervalued preceded a surge in the oil price.

An overall total of 261 panelists with $708 billion of assets under management participated in the survey from 6 July to 12 July. A total of 190 managers, managing $567 billion, participated in the global survey. A total of 145 managers, managing $323 billion, participated in the regional surveys.

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