BofA Merrill Lynch Fund Manager Survey Finds Investors Moderating Earlier Exuberance, Though Still Positive

Equity Appetite Increasingly Concentrated on U.S. and Japan

Global investors are moderating their earlier exuberance in the face of somewhat lower conviction over global growth, though they remain positive towards equity markets overall, according to the BofA Merrill Lynch Fund Manager Survey for April.

A net 49 percent of respondents now expect the global economy to strengthen in the next 12 months. This is a decline of as much as 12 percentage points from March. While the threat of a U.S. fiscal crisis has largely receded, anxiety over the eurozone and new risks – particularly the potential for conflict in Korea – has intensified. A “hard landing” in China also remains a concern.

Investors’ more cautious stance is reflected in their increased cash holdings. These are now at the highest level reported by the survey in six months (4.3 percent).

Fund managers showed sharper regional preferences than they have in past surveys. They are increasingly positive towards the U.S. and Japan, where 12-month views have reached their most bullish in seven years. Appetite for exposure to the U.S. dollar remains at the highest level in the survey’s history.

At the same time, panelists have grown more negative on both emerging markets and the eurozone. A small majority now look to underweight emerging markets – the survey’s weakest reading on this measure in over two years after a 30-point decline in just two months. Confidence in eurozone growth also fell sharply this month. A net 19 percent of regional investors expect the region to strengthen this year, down from March’s net 40 percent.

“‘Abenomics’ signals that Japanese policy-makers are joining the fight against deflation. This reinforces our expectation of a ‘Great Rotation’ into equities from fixed income,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “European expectations and risk appetite are moderating as global caution over the region wins out,” added John Bilton, European investment strategist.

Eurozone confidence declines

Lower confidence in eurozone growth is reflected in global investors’ move to a net 8 percent underweight. Regional investors sharply cut cyclical exposures such as Construction (down 38 percentage points), Basic Resources (down 22 points) and Oil & Gas (down 17 points) this month, while increasing defensive plays like Healthcare/Pharma (up 20 percentage points to a net overweight).

In a new question for the survey, fund managers were asked what event would be most positive for European risk appetite. More than half of respondents identified steps towards a regional banking union and agreement on structural reforms in key periphery economies. Given the inter-connection between eurozone banks and sovereigns, this reinforces the regional risks highlighted elsewhere in the survey.

Japan surpasses China

Confidence in Japan’s new expansionary policy is evident in the survey. Every regional fund manager polled expects the economy to strengthen over the next 12 months. Global investors also expect the policy shift to weaken the yen. Their appetite for the currency is now at its lowest since February 2002.

In contrast, bullishness on China is evaporating. A net 13 percent of regional investors now expect the country’s economy to strengthen in the next 12 months, down from a net 71 percent as recently as January. The survey’s global reading on this question is now down to its lowest level since last October.

Call for capex

The survey continues to highlight fund managers’ call for companies to put their significant volumes of cash to work, or to return it to their owners. With a net 60 percent regarding companies as underinvesting in their businesses, 48 percent would most like to see excess corporate cash flow directed to higher capital spending. Thirty-four percent want surplus funds distributed back to them through buy-backs or dividends, with only a far lower 11 percent viewing the reinforcement of balance sheets as a priority.

Despite this call for higher capex and their still-benign macroeconomic view, investors are more doubtful about prospects for significant global earnings growth. A net 38 percent now judge that companies are unlikely to raise EPS by as much as 10 percent this year. This stance has grown much more skeptical since March. Their expectations of corporate margin performance weakened similarly.

Survey of Fund Managers
An overall total of 252 panelists with US$725 billion of assets under management participated in the survey from 5 April to 11 April. A total of 200 managers, managing US$578 billion, participated in the global survey. A total of 125 managers, managing US$293 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS. Through its international network in more than 50 countries, TNS provides market information services in over 80 countries to national and multi-national organizations. It is ranked as the fourth-largest market information group in the world.

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