Bearish Sentiment Waning As Risk Appetite Grows
Thursday, August 19, 2010

Bearish sentiment among investors about the outlook for the global economy and corporate earnings has eased, according to the Bank of America (BofA) Merrill Lynch Survey of Fund Managers for August.

The survey shows a net 5% of respondents predicting that the global economy will improve in the next year. This represents a modest turnaround from July when a net 12% of respondents predicted the world economy would deteriorate.

While the percentage of respondents expecting below-trend growth and inflation remained unchanged at 73% in August, the survey shows recession fears easing. A net 78% of respondents think a double-dip recession is unlikely. After a deflation shock last month, investors have shifted their focus back towards inflation.

The survey shows an almost neutral view on the prospects for a rise in global inflation in the next year. Just 1% of respondents expect inflation to be lower in 12 months' time, compared to a net 12% in July. In addition, a net 14% of asset allocators indicated that global monetary policy is too stimulative, compared to just 5% in July. Nonetheless, 55% of respondents to the global survey are ruling out any rate hike in the US before the third quarter of 2011.

A key indicator tracking investors' risk and liquidity conditions returned to an almost neutral reading, indicating an improvement in sentiment.

"The spotlight of investor pessimism has shifted away from China and Europe to Japan and the US Investors clearly remain cautious, so better news on US growth and fiscal policy would be a pleasant surprise," said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Global Research.

"Investor sentiment on Europe has staged a remarkable recovery in the past few months, underpinned by greater optimism about Europe's banks. Economic data now has to continue to support this shift," said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.

A net 7% were overweight cash in August, compared to 13% in July and 19% in June. While there was an uptick in allocation to equities, there was a drop in allocation to bonds. A net 23% were underweight bonds in August, compared to a net 15% underweight in July.

The survey also shows a sharp drop in investors' appetite for US and Japanese equities, but a recovery in demand for Eurozone equities.

A net 14% of asset allocators are underweight US equities, compared to 7% overweight in July. Global asset allocators have also reduced their exposure to Japanese equities. A net 27% were underweight Japanese equities in August, compared to a net 7% in June.

In contrast, a net 11% were overweight eurozone equities in August, the most positive reading since October 2009. This compares to a net 10% who were underweight a month earlier. There was also good news for UK equities, on which investors are the most optimistic they have been since May 2007.

Global Emerging Markets (GEM) increased in popularity as concerns about a weakening of the Chinese economy waned. A net 38% of global asset allocators are overweight GEM equities, up from 34% in July and 31% in June.

Bearish sentiment towards the Chinese economy eased markedly. A net 19% of respondents expect the Chinese economy to weaken over the next year, compared to 39% just a month ago. This improved sentiment was supported by a shift towards commodities. A net 9% of respondents were overweight commodities in August, compared to a net 1% underweight in July.

Banks, consistently one of the most unloved sectors, finally saw a sharp improvement from a net 28% underweight in July to a net 19% underweight this month. This ranked alongside industrials as the biggest sector shift by investors. On the other hand, utilities and pharmaceuticals suffered steep declines in support.

The survey reveals that asset allocators think the US dollar looks undervalued, while the Japanese yen is seen as overvalued. A net 23% of respondents regard the dollar as undervalued, compared to just 3% in July. A net 62% see the yen as overvalued - a survey record - versus 55% a month earlier.

A total of 187 fund managers, managing a total of USD513bn, participated in the global survey from August 6 to August 12. A total of 157 managers, managing USD327bn participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Global Research with the help of market research company TNS.