Survey Shows Investors Taking on Risk in Spite of Macro Concerns
Investors have regained their appetite for risk despite rising concerns over the world economy and the corporate profit outlook, according to the Bank of America Merrill Lynch (BofA Merrill) survey of fund managers for April.
Spurred by growing conviction that rates will remain low, investors have reduced their cash holdings and increased equity positions, most notably in global emerging markets. Average cash balances have fallen in April to 3.7% of portfolios, down from 4.1% in March. A net 11% of respondents are overweight cash, down from a net 18% last month. A net 50% of asset allocators are overweight equities, up from a net 45% one month ago.
Appetite for emerging market (EM) stocks has bounced back with a net 22% overweight, up from a net 0% in March. Asset allocators have also increased their exposure to commodities with a net 24% overweight the asset class this month, up three percentage points on March.
Investors are putting cash to work while displaying concerns about the outlook. The proportion of the panel believing the world economy will strengthen in the next 12 months has fallen to a net 27% from a net 58% in February. Similarly, only a net 19% of respondents believe corporate profits will improve in the coming year, compared with a net 32% in March.
Forty-two percent of the panel believes that the world economy faces below-trend growth and above-trend inflation. At the same time, a significant number, 29%, expects above-trend growth and above-trend inflation. Energy, frequently used by investors to hedge against inflation, has become the number one global equity sector this month. Other sector allocations indicate a preference for defensive sectors such as pharmaceuticals.
“Central banks have succeeded in re-inflating economies, but investors are split on whether they have stimulated real economic growth,” said Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research.
“Investors are reluctantly overweight equities,” said Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research. “The combination of zero rates and rising inflation makes them fearful of bonds and cash.”
EMs Bounce Back in Spite of Questions over China
Deepening fears about the future of China’s economy have failed to quell the rebound in positive sentiment towards EM equities, particularly in Asia. A net 25% of respondents to the regional survey expect China’s economy to weaken in the coming year, up from a net 15% in March.
Still, sentiment towards the region’s equities has improved. A net 22% of the panel says that EMs is the region that they most want to take an overweight position in the future, the highest reading of all regions this month.
Behind the optimism over emerging market equities is belief in the profit outlook. A net 28% of respondents believe that EM corporates have the most attractive profit outlook. Among global emerging markets investors, Asia is the most preferred market for 58% of those surveyed, while Latin America is the least preferred.
Investors are looking favourably towards the US. A net 30% of asset allocators are overweight US equities in April, up from a net 23% in March. A net 48% believes that the outlook for US corporate profits is stronger than any other region.
European investors are also mirroring the global trend of increasing risk in the face of lower expectations. Concern about the future is particularly strong among European investors. Only a net 8% of the European panel believes the region’s economy will strengthen in the next 12 months, down sharply from a net 32% in March. However, cash positions fell in April to an average 3.3% of portfolios, down from 3.7% in March.
Belief in Japanese Growth Comes to a Halt
Four weeks after the earthquake and tsunami in the northeast of Japan, domestic and international investors have taken sharply negative views on the country. Within Japan, belief in economic growth has come to a halt – respondents are evenly split on whether the economy will grow or slow in the next 12 months.
International investors have reduced their exposure to the country’s equities. A net 18% of asset allocators are underweight Japanese equities this month, compared with a net 8% overweight in March. One in six respondents is ‘aggressively underweight’ in Japan, although one-third of the panel remains neutral. The outlook points to further selling of Japanese equities, however. A net 16% of the panel says that Japan is the region in which they are most likely to take underweight positions.
Calls for Higher Capex at Five-year High
Investors’ desire to see corporates increase capital expenditure (capex) is at its highest in five years. Forty-nine percent of the global panel wants companies to prioritise capital investment over alternatives including repaying debt and increasing dividends. Only 12% are urging corporates to prioritise balance sheet caution, down from 18% one month ago.