Global investors are keeping faith with equities while raising cash as markets enter the volatile year-end period, according to the Bank of America Merrill Lynch (BofA Merrill) Fund Manager Survey for December.
Asset allocators have hiked their cash holdings to an average 5%, while a net 28% are now overweight relative to their benchmarks – the survey’s highest reading on this measure since June 2012.
Despite this defensive move, respondents show renewed confidence in the global economy. A net 60% now expect it to strengthen over the next year – up almost 30 percentage points in two months. Against this constructive background, they are also more confident that corporate earnings will rise. At the same time, inflation expectations have fallen to their lowest level since August 2012.
Commodities are a significant factor in this. A net 36% of fund managers view oil as undervalued following its recent price fall. This reading is up over 20 percentage points since October and represents its lowest level since 2009.
In addition, expectations of European economic performance have improved, reflecting the likelihood of the European Central Bank (ECB) beginning a programme of quantitative easing (QE) next quarter – as 63% of respondents now expect, compared to November’s 41%. This translates into higher appetite for eurozone equities, notably banks, revealed in the survey.
“We are seeing capitulation out of energy and materials to the benefit of the dollar, cash, eurozone stocks and global tech and discretionary stocks,” said Michael Hartnett, chief investment strategist at BofA Merrill Research.
“The prospect of ECB QE has brought growing consensus on European equities, but the weakening business cycle and falling commodity prices are working against true earnings recovery,” said Manish Kabra, European equity and quantitative strategist.
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