Fresh optimism over China’s growth prospects has led to a marked improvement in economic sentiment globally, according to the Merrill Lynch Survey of Fund Managers for February.
Investors are at their most hopeful about the year ahead since the credit crunch took hold in July 2007, with the number who forecast a worsening economy in the 12 months ahead falling to a net -6%. This compares with a net -24% in January. The majority recognises, however, that the world economy is in recession.
Fears of a prolonged slowdown in China appear to be fading. The number of investors who predict lower growth in China over the coming 12 months has fallen sharply, to a net 21% in February from a net 70% in January.
Similarly, severe pessimism about the outlook for corporate earnings has started to ease. A net 43% of respondents expect to see deteriorating profits over the coming year, significantly lower than the 63% who held that view in December. A net 49% of the panel predicts inflation will fall over the coming 12 months, compared with 64% in January and 82% in December.
“Fund manager expectations for Chinese economic growth rose dramatically to their highest levels since 2007, and faint global decoupling hopes now reside solely with China,” says Michael Hartnett, chief global emerging markets equity strategist at Banc of America Securities-Merrill Lynch Research.
Com modities have enjoyed the sharpest pickup in terms of changes to asset allocations in the past two months. Investors hold a net 15% underweight position in commodities, down from a net 32% underweight in December.
Bond weightings were trimmed while equity allocations fell back to a net 34% underweight – the same position as in December. Investors have been pruning back their allocations to traditional defensive sectors and moving into more cyclical sectors.
Weightings fell in Telecoms, Insurance, Staples and Utilities. At the same time investors increased positions in Technology, Energy, Materials, Industrials and Discretionary Spending.
“Higher risk appetite, rising commodity sentiment and a strong valuation case could encourage further investment in energy and materials sectors,” says Gary Baker, Banc of America Securities-Merrill Lynch head of EMEA Equity Strategy. “We see this as best played out through sterling-denominated assets.”
Appetite for US equities has been reawakened in February, possibly boosted by poor market performance in January. The net overweight position in US equities has risen to 15% this month, up from 7% one month ago. The United States benefits from having the best profits outlook, and 31% of respondents want to overweight US equities in the next 12 months.
At the same time allocations to Japan have fallen starkly with investors who hold a net underweight position of 26%, compared to 15% in January. Traditionally, Japanese equities would benefit from a broad pickup in sentiment. Japan also suffers from having an overvalued major currency, according to the survey.
For the first time, respondents view the yen as more overvalued than the euro. Pessimism over the euro has broadly moderated, while the region’s macroeconomic outlook is somewhat more favorable.
“Eurozone growth expectations picked up to the highest level in 12 months in February,” says Baker. “But in contrast with the global picture, the number of European portfolio managers overweight cash spiked to the highest level since October 2001”
A total of 212 fund managers, managing a total of U.S. $599 billion, participated in the global survey from February 6 to February 12. A total of 177 managers, managing U.S. $372 billion, participated in the regional surveys. The survey was conducted by Banc of America Securities – Merrill Lynch Research with the help of market research company Taylor Nelson Sofres (TNS). Through its international network in more than 50 countries, TNS provides market information services in over 80 countries to national and multinational organizations. It is ranked as the fourth-largest market information group in the world.
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