Strong global economic sentiment for 2014 – BofA

Investor appetite for Japanese and European stocks steps up, the latest BofA Merrill Lynch Fund Manager Survey has shown.

The proportion of investors believing the global economy will strengthen in the year ahead has risen to a net 71% from a net 67%in November, the survey, which questioned an overall total of 237 panelists with US$655bn of AUM, also revealed.

Similarly, the outlook for profits has ticked upwards month-on-month and is far stronger than the end of 2012:

  •  41% said they believe global profits will improve over the coming year, against 11%taking that view a year ago.
  • 55% said they want corporations to prioritize capital expenditure over other uses of cash flow, against 45% a year ago.

Preference for equities over bonds remains at historically high levels, BofA also said.

“The spread between equity overweights and bond underweights stood at 118 percentage points in December, compared with 76 points one year ago and just 19 points in July 2012,” the report reads.

Investors also demonstrated a strong preference for Europe and Japan. Global investors have increased overweight positions in Japanese and eurozone equities in the past month and indicated appetite for more, while domestic investors in each region have become more optimistic.

“Weakness in the US dollar next year is the biggest threat to positioning given a consensus to go long Japanese and European cyclicals,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

“Belief in the European recovery has reached a stretched level, leaving markets vulnerable to profit taking as portfolio managers seek uncrowded alternatives,” said John Bilton, European investment strategist.

Banks popular – commodities unpopular

Investors and asset allocators have increased allocations towards banks over the past month. The net percentage of the global panel overweight banks rose to a net 17% from a net 12% in November.

European investors have moved particularly sharply into this maligned sector. A net 22% of European respondents said they are overweight banks this month, compared with an equal number overweight and underweight in November.

Commodities and related stocks remain deeply unpopular. A net 31% of asset allocators are underweight commodities, up seven percentage points month-on-month. A net 14% are underweight energy stocks, a monthly rise of three percentage points.

More cash on the sidelines

Average cash balances stand at 4.5% of portfolios, with 16% of asset allocators say they are overweight cash, up from a net 9 percent in November. The higher cash levels coincide with expectations of higher interest rates and a belief by three-quarters of the panel that the Fed will introduce tapering in the first quarter of 2014, BofA Fund Manager Survey also revealed.


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