Merrill Lynch Fund Manager Survey: Optimism builds within the eurozone

The BofA Merrill Lynch Fund Manager Survey for June highlights a big drop in sentiment towards emerging markets and Japan among investors, who are returning to Europe.

While last month’s survey showed investors’ sentiment was starting to taper – as cash levels rose, expectation for below-trend growth shot up and positions on commodities suggested extreme pessimism -confidence has risen in the past month in spite of market instability and a 2.5% fall in global equities.

A net 56% of global investors believe the world economy will strengthen over the coming year, up from a net 48% in May. Equity allocations have increased, with a net 48% of asset allocators overweighting equities, compared with a net 41% in May.

However, while allocations to the eurozone and US rose, allocation to global emerging market equities fell to their lowest since December 2008. A net 9% of asset allocators are now underweight emerging market equities – the first underweight since 2009 and down from a net 3% overweight last month.

“Investors are positioned for bad news from emerging markets,” Manish Kabra, European equity strategy at Merrill Lynch said.

“They are ready for a proper crash, especially on bonds and equity where emerging markets have seen the biggest outflows.”

Kabra added that for the first time investors have identified a China hard landing as a greater risk than eurozone sovereigns or banks. As the survey showed, a net 6% of global asset allocators are overweight eurozone equities, representing a 14% swing from May when a net 8% were underweight.

Fear that Abenomics will fail has become investors’ second-largest tail risk and interrupted the strong run in Japanese equities.

However, when asked about investment sentiment towards Japan, Kabra said: “People are still quite calm about Japan. They see the situation as short-term market volatility and believe that it’s going to stabilise soon,” he said.

“The biggest contrarian play in the market today is assets linked to China. The lows in emerging market equity and commodity allocations suggest the market has over-positioned itself for a shock from China,” Michael Hartnett, chief investment strategist at Merrill Lynch Global Research said.

Despite the survey highlighting a boost in eurozone investor confidence, Kabra said investors are still quite cautious when it comes to investing in peripheral Europe, with French stocks seemingly preferred.

 

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