Europe pessimism deepens as investors stay away – survey

European sentiment about the economic outlook fell in July to its lowest level since April 2009 with global asset allocators cutting their exposure in the region, according to a BofA Merrill Lynch global research report published this week.

European pessimism has been driven by the renewed eurozone sovereign debt crisis, the report said. Global investors are choosing to stay away and the eurozone was the only region that saw global asset allocators cut their weightings.
Most other regions showed improvements in the macro outlook including the US and Japan. The Chinese outlook also broke its recent downward trend.

For fund managers, the last two months’ rotation into defensive positions was partly reversed, with investors preferring cyclical positions. This suggests investors want to reduce their domestic exposure in expectation of stronger global growth.

The oil and gas sector was the most popular choice. Banks were once again the least popular with a 57% underweight – the worst level since February 2009, followed by utilities at 51% underweight.

The big underweight in European banks and in the eurozone as a region risks causing a painful snap-back on any improvement, the report said.

The economic outlook was down sharply with a net 22% of respondents expecting weaker European growth in the next 12 months. The profit outlook has stabilised, but at a low level with a net 14% of respondents expecting weaker profits over the next 12 months. A net 42% of global portfolio managers see the eurozone has having the worst profit outlook.

The importance of the EU sovereign debt crisis in investors’ minds was underlined by responses to a question on the perceived biggest tail risk. Nearly two-thirds (64%) of respondents said EU sovereign debt funding was the number one risk. “Premature fiscal tightening” came second with 11% of respondents and all other choices were well below 10%.

The eurozone is the only region to see weightings cut by global asset managers in July. A net 21% of asset allocators are now underweight in the Eurozone – the highest level since June 2010.

Inflation fears have declined with only 16% of respondents expecting rising inflation, compared to 82% six months ago. Monetary policy is also seen as increasingly less stimulative and respondents expect the European Central Bank to increase interest rates despite the sovereign debt crisis.

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