Europe is staging a comeback in investor portfolios while concerns about the US fiscal cliff have taken center stage, according to the BofA Merrill Lynch Fund Manager Survey for September.
The EU sovereign debt crisis is no longer the top tail risk identified by investors, for the first time since April 2011, having been surpassed by the US fiscal cliff. The proportion of the panel who mostly fear EU sovereign risk fell to 33 percent from 48 percent in August. The US fiscal cliff has become the biggest tail risk for 35 percent of global investors. “Investors now view the US fiscal cliff as a greater threat than the euro zone — and the upcoming election is putting these fears into sharper focus,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
Asset allocators have taken an overweight position in euro zone equities for the first time since February 2011 when the euro zone sovereign crisis deepened. A net 1 percent of global asset allocators are overweight the region compared with a net 12 percent underweight in August. For the first time since summer 2009, the survey has recorded three consecutive months of double-digit positive swings toward European equities. A net 9 percent of global investors say that the euro zone is the region they most want to overweight in the coming 12 months, compared with a net 5 percent nominating region as their top prospective underweight in August.
Pessimism within Europe is fading, according to the Regional Fund Manager Survey. European investors are equally split on whether region’s economy will strengthen or weaken in the next 12 months – whereas in August a net 23 percent said it would weaken. Risk appetite is rising. European investors have begun to put cash to work, raising allocations on 12 out of 19 European sectors.
“We have seen a 25 percent rally in European stocks from the June low, but sentiment on Europe has only just turned positive. Any extension of the rally is likely to be led by sector rotation and buying of unloved, domestically exposed stocks,” said John Bilton, European investment strategist at BofA Merrill Lynch Global Research.
As Europe becomes less unloved, investors appear to be moderating their bullish view of US equities and have turned more bearish on Japan.
The proportion of asset allocators’ overweight positions in US equities has ticked down to a net 11 percent from a net 13 percent in August.
Looking ahead, investors appear to see poor value in the US. A net 58 percent identify US equities as the most overvalued globally (up from 51 percent a month ago) while a net 43 percent identify the euro zone as the most undervalued. This represents the greatest divergence between European and US valuations in the history of the survey.
While investors moderately reduced their underweight positions in Japanese equities, this month’s survey suggests sentiment is turning more bearish. A net 23 percent of asset allocators are now underweight Japanese equities, a small improvement from a net 25 percent. But a net 24 percent of investors say Japan is the region they most want to underweight – double the level expressing that view in August.
In a month when global economic sentiment continued to rise, profit expectations have continued to fall. A net 17 percent of the global panel expects the world economy to strengthen in the coming 12 months, a rise of two percentage points since August, consolidating the strong gains the previous month.
However, a net 28 percent believe corporate profits will deteriorate over the same period, up from a net 21 percent a month ago. Investors are growing impatient about low levels of investment. A growing majority – a net 59 percent – say that corporates are underinvesting, up from 54 percent in August. A net 41 percent of investors believe corporates should increase capital spending, an increase from a net 33 percent in August.
While there is evidence of some pro-cyclical rotation, European investors remain underweight in several higher-beta sectors; notably banks, basic resources, real estate and construction.
At the global level, a net 21 percent remain underweight banks this month, down 14 percentage points month-on-month. The scaling back of bank underweights was even more pronounced in Europe, albeit from a deeper underweight position. A net 25 percent of the European panel is now underweight banks, down from a net 43 percent in August.