Investors have turned bearish in their outlook for the global economy and corporate earnings, according to the BofA Merrill Lynch Survey of Fund Managers for July.
The survey shows a net 12% of respondents predicting the global economy will deteriorate in the coming 12 months, the first negative forecast since February 2009. This represents a big turnaround from June when a net 24% forecast the economy to strengthen.
A net 4% of the panel expects corporate profits to worsen in the coming year, also the first negative outlook in more than a year. It compares with a net 28% forecasting earnings growth just last month. A net 1% says that profit margins will fall in the coming year, compared with a net 31% predicting improved margins in May.
Risk appetite has dipped with investors moving into cash and reducing exposure to cyclical stocks. Cash now comprises 4.4% of an average portfolio, up from 4.1% in May. A net 39% of the panel is taking lower than normal risk, more than double the proportion in May. Allocations towards pharmaceuticals, a classic bear market sector, increased to the highest level since March 2009.
“July’s survey echoes the sentiment that investors expressed during the recession in early 2009,” said Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research.
“Growth and profit expectations have double-dipped. Should upcoming data fail to confirm a double-dip, risk assets will have a much better third quarter,” added Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.
Out of the US, Into Emerging Markets and Eurozone
Investors are more concerned about the outlook for US equities than at any point since November 2006, with a net 14% of the panel saying it is the region they would most like to underweight. In June a net 14% said the US was the region they most wanted to overweight. Global asset allocators have already reduced exposure to the region, with net 7% of panel overweight US equities, down from a net 20% in June.
Global emerging markets (GEM) has been gaining in popularity while investors are also returning to the eurozone – in spite of weakened economic sentiment towards China and Europe respectively.
A net 34% of global asset allocators are overweight GEM equities, up from 19% in May. A net 48% of investors identify GEM as the region they would most like to overweight over the next 12 months, more than double the reading in May. Over the same period, the proportion of respondents predicting a weaker Chinese economy has surged to a net 39% up from a net 3%. The proportion of asset allocators underweight eurozone equities has fallen to a net 10%, down from a net 27% in June. At the same time, a net 17% of European investors expect the region’s economy to weaken.
Buying Expensive Bonds; Selling Cheap Equities
Respondents have scaled back positions in global equities while moving into bonds in the past two months. The proportion of asset allocators overweight equities has slipped to a net 11% from 30% in May. The proportion underweight bonds has fallen to a net 15%, down from 29% in May. This is despite investors acknowledging that equities are increasingly undervalued and bonds increasingly overvalued. The spread in perceived valuations of bonds and equities is at its widest since 2003.
Risk aversion is not restricted to long-only investors. Hedge funds have reduced their net equity exposure to its lowest since March 2009.
Four out of 10 Investors Predict No Fed Rate Hike for a Year
Inflation concerns have eased as sharply as growth concerns have appeared. A net 12% of investors predict inflation to fall in the coming year, a turnaround from June when a net 12% were forecasting higher inflation. As a result investors are pushing back the date they expect next to see a rate hike in the US or eurozone. Four out of 10 respondents to the global survey are ruling out any rate hike by the Federal Reserve before July 2011, and only 4% predict an increase this year. The regional survey shows 47% of European investors predict no rate hike from the European Central Bank (ECB) before July 2011.
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