Investors Braced for Below Trend Growth in 2012, Finds Survey
Global investors are looking to US equities as they prepare themselves for a year of low growth and low inflation in 2012, according to the BofA Merrill Lynch Survey of Fund Managers for December. The survey of 190 institutional investors indicates a growing majority, almost two-thirds of the panel, predict 2012 will be a year of below-trend growth and below-trend inflation. It is the highest such reading since October 2010 and up from 52% in November.
Investors are responding to the weak outlook with a preference for US and emerging market equities, while the negative stance towards the eurozone hardens. A net 50% of the panel says that the outlook for corporate profits is the most favourable in the US – up from a net 47% last month. A record number, a net 72%, name the eurozone as having the least favourable outlook for corporate profits. Investors have also expressed a view that the dollar will strengthen and the euro weaken in 2012.
Some asset allocators dipped into cash reserves to make an end-of-year move into equities with the US their preferred destination. A net 8% of asset allocators are overweight equities this month, compared with a net 5% underweight in November. But the panel only increased equity positions in one region – the US.
“With improving growth prospects, U.S. equities are seen as a popular destination and a refuge from turmoil,” said Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.
“Investors are slightly more optimistic about equities but retain a defensive approach, so that means reduced European exposure and a preference for counter-cyclical stocks,” said Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research.
Investors Divided Over Eurozone’s Future
Global investors are split over the future of the euro and the question about whether the eurozone can remain intact. Nearly half of the panel (48%) believes that no member state will exit the euro in 2012 or the foreseeable future.
Nearly a quarter of the panel of 190 institutional investors (24%), expect one of the 17 member states to leave the euro in the first half of 2012. In total, 45% expect a member to depart in the foreseeable future, with 7% undecided.
Defensive Sector Positioning
Investors have consolidated defensive positioning in equities. Global allocations to pharmaceuticals and staples increased over the past month. Pharmaceuticals have taken over as the most popular global sector with a net 36% of respondents holding an overweight position, up from a net 31% in November.
Investors reduced exposure to growth and cyclical sectors including technology, industrials and discretionary. In industrials and discretionary, respondents were extending already underweight positions.
Liquidity, Inflation Indicators Show Comparison with Early 2009
Key indicators of market sentiment in the Survey of Fund Managers show parallels with the credit crunch months of early 2009. Investors say that liquidity conditions have deteriorated significantly in the past month to reach their worst level since April 2009. A net 13% of the panel rates conditions (such as depth of market and breadth of bid-offer spreads) as negative.
In October, a net 4% described conditions as positive, and at the beginning of 2011, more than a net 50% of respondents were describing market conditions as positive. Liquidity still has some way to deteriorate before reaching the nadir of the credit crunch when more than a net 60% described conditions as negative.
Concerns about inflation have eased to levels not seen since 2009. The proportion of the panel predicting a fall in inflation fell to a net 34% in December, down 2 percentage points since November and the lowest reading since March 2009. For the first time since March 2009, a majority (a net 6%) believes that global monetary policy should be more stimulative. At the depth of the crisis more than a net 60% called for monetary stimulus.