Fears of a global economic slowdown have come sharply back into focus, and expectations of decisive action by policy makers have grown, according to the BofA Merrill Lynch Survey of Fund Managers for June.
A net 11% of the global panel believes that the global economy will deteriorate in the coming 12 months – the weakest reading since December 2011. Last month, a net 15% believed the economy would strengthen and the negative swing of 26 percentage points is the biggest since July-August 2011 as the sovereign crisis built. The outlook for corporate profits has suffered a similarly negative swing. A net 19% of the panel believes that corporate profits will fall in the coming 12 months. Last month, a net 1% predicted improving corporate profits.
Investors have adopted aggressively ‘risk off’ positions. Average cash balances are at their highest level since the depth of the credit crisis in January 2009 at 5.3% of portfolios, up from 4.7% in May. The Risk and Liquidity Composite Indicator fell to 30 points, versus an average of 40. Asset allocators have moved to a net underweight position in global equities and increased bond allocations.
Support for policy stimulus has grown. The majority of the panel now believes that global monetary policy is “too restrictive”. A net 6% take that view, the highest since December 2008. A net 15% said policy was “too stimulative” in May. The proportion of global investors saying global fiscal policy is “too restrictive” has continued to rise to a net 28% from a net 23% in May.
“Investors have taken extreme ‘risk off’ positions and equities are oversold, but we have yet to see full capitulation. Low allocations in Europe are in line with perceptions of growing risk levels in the eurozone,” said Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research. “Hopes expressed last month of a policy response have now become expectations. Markets are keenly anticipating decisive action from key policy meetings in June,” said Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.
Global Equity Under-valuations Match All-time Low
Global equities are at their most undervalued since August 2011. A net 48% of the global panel believes global equities are undervalued, matching the lowest level since the survey began. The reading is up from a net 35% in May and a net 22% in April. At the same time, a net 83% of the panel says that bonds are overvalued – also an all-time high and up from a net 74% a month ago.
The view is even more concentrated in Europe. A net 45% of the global panel sees Europe as the most undervalued region – an all-time high reading and up from 27% in May.
Asset allocators moved out of global equities with a net 4% underweight the asset class, compared with a net 16% overweight equities last month. They reduced their underweight position in bonds to a net 23%, down from a net 33 %in May. Global investors have reached their closest position to being equal weight equities and bonds since November 2011.
Fears Resurge of Chinese Hard Landing
Last month’s growing optimism about China’s economy has halted in June’s survey. The panel is equally split about whether China’s economy will get stronger or weaker in the year ahead; last month, a net 10% predicted it would strengthen. Significantly, 16% of respondents now believe China’s economy faces a “hard landing” – up from 9% in May.
Broadly, sentiment towards emerging markets has softened. A net 17% of global asset allocators are overweight Global Emerging Market equities – down from a net 34% in May. Commodities have also lost favour. A net 8% of the panel is underweight the asset class, the lowest reading since February 2009.
Allocation by global asset allocators to US equities improved with a net 31% overweight US stocks, up five percentage points month-on-month. In contrast, domestic investors have turned bearish. A net 36% of US respondents to the regional survey expect the US economy to deteriorate in the coming 12 months.
Back to the Old Counter-cyclical Routine
In line with the ‘risk off’ mood, investors reached for their counter-cyclical auto-function key again this month. Allocations to pharmaceuticals, utilities, telecoms and staples all rose from May’s levels. The biggest reductions in sector positions came in materials, energy and industrials. Technology remains the most favoured sector.
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