2013: Managers’ fears on fiscal cliff are easing, BofA Merrill’s Lynch finds

Confidence in a recovering global economy is extending into 2013 as investor fears surrounding the fiscal cliff eased, BofA Merrill’s Lynch survey on 255 fund managers found in December.

About 40% of investors believe the global economy will strengthen in the year ahead, a rise of 6% month-on-month and double the reading two months ago.

The number of investors viewing the US fiscal cliff as the biggest tail risk has fallen to 47% down from 54% in November. Despite this fall, however, the fiscal cliff remains the number one worry.

Emerging markets are the preferred region for the panel. Optimism about China’s economy has reached the highest level recorded by this survey. A net 67% of the regional survey respondents say China’s economy will strengthen in the coming year, up from a net 51 percent in October. A net 38% of asset allocators are overweight emerging market equities, double the level of September’s survey.

The number of asset allocators overweight US equities has fallen since November, but allocations to the eurozone are outweighing US allocations for the first time since the end of 2010.

The net percentage of asset allocators overweight eurozone equities has risen to seven, up from a net 1% in November. In terms of sector, investors have maintained a broadly “risk on” stance – allocations to cyclical sectors Consumer

Discretionary and industrials have increased, and the market is firmly overweight both. But the number one sector remains Pharmaceuticals.

Emerging market corporates have consolidated their position as the panel’s favorite. A net 38% of investors say that global emerging market equities have the best outlook for corporate profits in the coming year, up from a net 32% in November.

Global investors’ caution towards Japan eased, while domestic optimism has strengthened. The proportion of global asset allocators underweight Japanese equities has fallen to a net 20% down from a net 34%, the survey found. Investors also said that liquidity conditions are at their best since May of this year.

“The bulls are back in China, while policy makers elsewhere put bears onto the back foot. If the bulls are to claim a decisive victory, we need hard evidence that the economy is reaccelerating,” Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research said.

“Growth expectations and positioning are converging to mid-range levels, but many still think earnings expectations are too high. When these concerns subside, it’s likely that cheap valuations of European stocks will attract global fund managers,” said John Bilton, European investment strategist.



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