The global economic outlook remains positive in spite of a sharp deterioration in investor sentiment towards and within Europe, according to the BofA Merrill Lynch Survey of Fund Managers for July.
A net 19 per cent of global fund managers and asset allocators believe that the global economy will strengthen in the next 12 months. This number has grown for two successive months from a net 10 per cent in May. The global outlook for corporate profits has also ticked upwards. A net 11 percent of investors predict higher global corporate profits in the coming year, up from a net 7 percent in June.
But fears over sovereign debt have fueled the highest level of European economic pessimism since depths of the credit crisis. Nearly two thirds of the panel identified EU sovereign debt funding as the number one tail risk, 64 per cent compared with 43 percent in June. A net 22 percent of respondents to the Regional Survey expect Europe’s economy to weaken in the coming 12 months – the most negative reading since April 2009.
European investors have sharply reduced positions across many sectors, but the most eye-catching position is in banks. A net 57 percent of the European panel is now underweight banks (versus 33 per cent in June), leaving the sector at its lowest ebb since February 2009.
While respondents to the global survey have scaled back positions in eurozone equities, they have increased them in every other region, including the US. As sentiment improves, desire for a third round of quantitative easing (QE3) remains low – 40 percent of respondents said in July that they are not expecting QE3. But 48 percent of the panel says that QE3 will be necessary if the S&P 500 falls by 20 percent.
“Our question about QE3 this month shows that investors don’t want policy makers to panic now – but many expect the Fed to apply QE3 if the S&P 500 falls below 1,100,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research. “Investors have acted decisively in response to recent developments in EU sovereign funding. The question is whether eurozone equities have been oversold,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
As the eurozone suffers, Japan and Global Emerging Markets are the regions with the greatest positive sentiment momentum.
A net 33 percent of asset allocators were overweight Global Emerging Markets equities this month, a rise of 10 percentage points since June. Looking ahead, Global Emerging Markets is the region investors would most like to overweight.
Among Asian and emerging market portfolio managers, concerns over China’s growth prospects have eased. A net 24 percent of respondents are now predicting slower growth over the next 12 months down from a net 40 percent in June.
Allocations to Japanese equities received a large positive swing over the past month. A net 22 percent had been underweight in June but that transformed to net 2 percent overweight in July. Expectations within Japan are also strong, especially regarding corporate performance. A net 76 percent of respondents to the Japanese Regional Survey expect corporate earnings to improve in the next 12 months, up from a net 54 percent in June. A net 56 per cent believe that Japanese equities are undervalued.
An overall total 265 panellists with $792 billion of assets under management participated in the survey from 8th to 14th July. A total of 196 fund managers, managing a total of $631 billion, responded to the Global FMS questionnaire. A total of 149 managers, managing $409 billion, responded to the Regional FMS questionnaire.