Action, not talk, wanted from policy makers – BofA survey

Investors want decisive action from policy makers in order to avoid a deterioration in the global economy over the next 12 months, according to a survey of fund managers by Bank of America Merrill Lynch.

The BofA Merrill Lynch Global Research report found that 11% of its global panel believes that the global economy will deteriorate in the next 12 months, making this weakest reading since December 2011.

The biggest risk to investors is the European sovereign debt issue, with many looking towards policy responses to be put in place in order to bring back investor confidence. Investors have become even more prone to risk aversion, and are willing to sit on cash balances until further decisive policy responses are made.

Support for policy stimulus has grown, with a majority of the panel thinking that the current global monetary policy is too restrictive.

Gary Baker, head of European equity strategy at BofA Merrill Lynch Global Research said: “Investors have taken extreme ‘risk off’ positions and equities are oversold, but we have yet to see full capitulation. Low allocations in Europe are in line with perceptions of growing risk levels in the eurozone.”

Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research said: “Hopes expressed last month of a policy response have now become expectations. Markets are keenly anticipating decisive action from key policy meetings in June”.

Key dates to monitor are the Greek elections on June 17th, the G20 summit on June 18/19 and the Federal Open Market Committee (FOMC) meeting statement on June 20th.

Baker added: “It’s not just a case of any old policy will do, what the market is now demanding is a lot more seriousness in detail and, if you will, a pan-European if not a global response to this rather than peace-meal efforts.”

According to the research report, global equities in general are at their most undervalued since August 2011. European equities have never been cheaper according to the survey results, which found 45% of investors viewing them as predominantly undervalued. This is an all-time high reading and up sharply from 27% in May 2012.

Baker continued: “In the history of the survey we have never seen any single region so lowly valued, whether that was Japan, the US or any other region. Why is that? It’s not that growth is collapsing expectations; yes it’s low but people know that. It is clearly about sovereign tail risk. It’s the biggest tail risk out there for investors, with 65% of investors saying that that is the biggest negative tail risk out there. If we see policy response that successfully cauterises that situation, the resulting investment flows could be quite spectacular.”

Eurozone equity weightings are also at the lowest level since September 2011; , it remains the least preferred region for the third consecutive month. Asset allocators have moved to a net underweight position, at 4% compared to 16% in May. Industrials are now the most favoured sector in the EU, alongside oil and gas, but this is still low at 13%.

The only region to see an improvement this month was the US – 31% overweight – leaving a gap between US and eurozone weightings, the widest on record. This is despite the US composite growth indicator to falling to just 29, which is even lower than Europe.

Average cash balances are at their highest level since the depth of the credit crisis in January 2009, at 5.3% of portfolios, up from 4.7% last month, and according to Baker: “Investors are sitting on their hands, on their cash. They are content to wait and see what policy decisions are made.”

 

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