Fund Managers Optimistic On Global Growth; Love Europe, Want Capex - BoA Merrill Lynch Poll

Anna Hallissey

22 January 2014

Investors start the year in optimistic mood globally – with some caveats - and one of the most striking features is that they are most favourable about Europe, while emerging markets are unloved, according to the latest monthly fund manager survey by .

Europe has become the “most-loved region for the fifth month running”, John Bilton, European investment strategist at BoA Merrill Lynch Global Research, told journalists yesterday at a briefing about the firm’s January 2014 survey.

The poll of 234 respondents with $653 billion of assets under management found that only six per cent of portfolio managers saw a recession risk in Europe and six per cent of project managers saw earnings potentially deteriorating in the next year. Only six per cent of investors saw European stocks as expensive.

However, Bilton added: “Despite the global cash cushion, there is a risk that European positioning is a little bit stretched. So if anything, it could be for markets here in Europe to drift off a touch from here.”

The big picture
Global growth expectations have hit their highest level since 2009. Three-quarters (a net 75 per cent) of those asked believed that the global economy will strengthen this year, building on the positivity that has been creeping since late 2012. In December, a net 71 per cent of respondents took this view.

The outlook for corporate profits has also risen from a net 41 per cent expecting an improvement last December to a net 48 per cent taking this view in January. Among the regions, a net 29 per cent of investors choose both the US and Japan as having the most favourable prospect for profits.

BoA Merrill Lynch said improved investor optimism has caused more appetite for risk: a net four per cent of investors have a higher-than-normal level of risk in their portfolios.

Europe’s expectation of profit improvement has seen a switch since the previous month’s survey. In December, 4 per cent of participants expected a profit deterioration while in January, 8 per cent of respondents conversely expected profit improvements.

Capex
A closely watched issue in recent months has been a desire by firms to spend cash on capital. The survey found that investors increasingly want companies to use profits on growing their businesses; a net 67 per cent of respondent say firms are not investing enough, which is the highest ever such balance in the history of the survey.

When asked what companies should do with their cash, 58 per cent said they should focus on capital spending, and only 11 per cent of respondents wanted companies to preserve cash.

Emerging markets are out of favour – having suffered in relative terms last year when the US Federal Reserve first indicated it wished to wind down its quantitative easing programme. Some net 61 per cent of respondents expect corporate profits will sharply decline in global emerging market companies, compared with a net 32 per cent taking the same view only a month earlier.

The biggest “tail risk” – or extreme event – to the global outlook is a sharp decline in China’s economic position and collapse in commodity prices; 37 per cent of respondents take this view. By contrast, only 14 per cent of the investors polled expect a European sovereign/banking crisis and a geopolitical crisis.

In terms of regions, a net 26 per cent of respondents are bullish – or overweight – of Japanese equities, compared with 34 per cent taking this view in December, 2013; as far as US stocks are concerned, a net 6 per cent of respondents are overweight, suggesting that positioning in the market is not yet overstretched. In the case of European equities, a net 41 per cent of respondents are overweight.

The survey was conducted from 10-16 January. 185 managers participated in the global survey and 115 participated in the regional survey. It was conducted by BofA Merrill Lynch Research with the help of market research company TNS.