BofA’s Fund Manager Survey highlights ‘European vacation

The EU growth outlook has stabilised, with 44% of managers expecting a stronger economy, yet investors are cautious in sector positioning, according to Bank of America Merrill Lynch’s latest monthly survey.

European investors are out of financials, global cyclicals and domestic EU exposed sectors sectors despite subdued EU tail risks and stable global and EU growth outlook, the survey highlighted.

Tail risk fears remain subdued, with just 14% of respondents seeing the EU as the biggest risk for global economy, and EU cash levels rose to 4.4% in July, in line with the rise in global cash levels to 4.6%. While global equity allocation rose to net 52% overweight (from 48% in June).

“However, investors are still taking risk off the table in Europe,” said John Bilton, European investment strategist at BofA Merrill Lynch Global Research.

From a global perspective, investors remain confident in the outlook for economic growth despite their sharp loss of faith in China, according to the BofA Merrill Lynch Fund Manager Survey for July.

As the survey also highlighted, sentiment towards China has continued to worsen. A net 65% of regional panelists now see the country’s economy weakening in the next year, compared to a similar majority anticipating stronger GDP as recently as December 2012.

A “hard landing” in China stands out as the major risk that fund managers identify, with over half (56 percent) ranking it first on this measure compared to one-third of respondents a month ago.

Investors’ conviction that developed economies the US and Japan in particular will still achieve growth is reflected in their growing appetite for equities. A majority of asset allocators are now overweight equities, up nine points in two months to a net 52%. Confidence in the US is also apparent in a net 83% favouring the dollar over other currencies, the highest reading yet recorded by the survey.

Stances towards bonds are increasingly negative. More than half (55%) of fund managers are now underweight fixed-income instruments. They have also lifted their cash holdings to 4.6%. This is the highest level in a year and represents a contrarian buy signal for equities.

“With the support of a host of buy signals in recent weeks, the ‘Great Rotation’ is in full force. Our positive view of equities would be further reinforced if the loss of faith in China’s growth story turns out to be overdone,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

“Global investors are trailing the eurozone’s economic momentum. They should prefer cheap domestic exposures to its rich EM exposures,” Bilton added.

 

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