The global economic outlook remains positive in spite of a sharp deterioration in investor sentiment towards and within Europe, according to the Bank of America Merrill Lynch (BofA Merrill) survey of fund managers for July.
A net 19% of global fund managers and asset allocators believe that the global economy will strengthen in the next 12 months. This number has grown for two successive months from a net 10% in May. The global outlook for corporate profits has also ticked upwards. A net 11% of investors predict higher global corporate profits in the coming year, up from a net 7% in June.
But fears over sovereign debt have fueled the highest level of European economic pessimism since depths of the credit crisis. Nearly two-thirds of the panel identified EU sovereign debt funding as the number one tail risk (64% compared with 43% in June). A net 22% of respondents to the regional survey expect Europe’s economy to weaken in the coming 12 months – the most negative reading since April 2009.
European investors have sharply reduced positions across many sectors, but the most eye-catching position is in banks. A net 57% of the European panel is now underweight banks (versus 33% in June), leaving the sector at its lowest ebb since February 2009.
While respondents to the global survey have scaled back positions in eurozone equities, they have increased them in every other region, including the US. As sentiment improves, desire for a third round of quantitative easing (QE3) remains low – 40% of respondents said in July that they are not expecting QE3. But 48% of the panel says that QE3 will be necessary if the S&P 500 falls by 20%.
“Our question about QE3 this month shows that investors don’t want policy makers to panic now – but many expect the Fed to apply QE3 if the S&P 500 falls below 1,100,” commented Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research. “Investors have acted decisively in response to recent developments in EU sovereign funding. The question is whether eurozone equities have been oversold,” said Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research.
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