Global investors appear to be coming to terms with the prospect of a default by the Greek government, according to the BofA Merrill Lynch Survey of Fund Managers for October. More than nine out of 10 (92%) of the 199 respondents to October’s global survey believe that Greece cannot avoid default. Seven out of 10 respondents predict a default by April 2012. Despite this overwhelming consensus, investors are less worried about sovereign risk than a month ago and less pessimistic about global growth.
EU sovereign debt funding remains the biggest tail risk in investors’ minds, but concern has fallen from September’s highs. While 68% of respondents considered it their number one concern last month, only 61% take that view in October.
The survey also suggests that the outlook for growth has stabilised and fears of global recession have receded. The proportion of the panel expecting a global recession in the coming 12 months has fallen to a net 25% from a net 40% in September. A net 15% of the global panel believes growth will weaken in the coming year, down from a net 17% in September.
“The survey shows investor consensus has priced in, or hopes for, an orderly default by Greece,” said Michael Hartnett, chief global equities strategist at BofA Merrill Lynch Research. “Europe appears back from the brink. But it seems investors are waiting for the all clear from both Europe and emerging markets before committing cash,” said Gary Baker, head of European equities strategy at BofA Merrill Lynch Research.
Europe Back from the Brink
A month ago, the world was shunning Europe’s markets, but global negativity towards the region has eased. A net 7% of the panel says that the eurozone is the region they would most like to underweight in the coming 12 months, down from a net 40% in September. More investors (a net 8%) would most like to underweight Japan in the coming year.
A net 29% of asset allocators are currently underweight eurozone equities, down from a net 38% in September. Sentiment towards the UK has also improved. While a net 26% were underweight UK equities a month ago, that figure fell to a net 12% in October.
Within Europe, however, investors have become more concerned about the macroeconomic outlook. A net 37% of respondents to the European regional survey expect a recession in the coming 12 months, up from a net 11% a month ago.
Cash Levels High; Equities and Commodities Demand Falls
While some indicators show sentiment improving this month, risk aversion remains at or close to September’s highs. Average cash balances have increased month on month to 5% of portfolios, up from 4.9% in September. A net 39% of asset allocators are overweight cash (36% a month ago).
A net 7% of asset allocators are underweight equities, more than September’s level of 5%. Emerging market equities has seen a steep fall in popularity. Only net 9% of asset allocators say they are overweight emerging market equities in October, compared with a net 30% in September. A net 47% of regional fund managers predict China’s economy will weaken in the coming year, up from 30% last month. The panel has also moved slightly underweight commodities having been slightly overweight in September.
Technology: The Last Cyclical Outpost
With emerging markets and commodities losing favour this month, only one cyclical investment remains popular. Technology retains its position as the world’s favourite sector. Pharmaceuticals and staples, more defensive investments, stand at two and three respectively. Allocations to technology increased month on month. A net 39% of the panel is overweight the sector, up from a net 35% in September.
A second sign that risk appetite might be stirring among some investors is that bearishness towards banks has fallen sharply. A net 34% the global panel is underweight banks this month, down from a net 47% in September.
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