Despite being worried about valuations, global investors are increasingly bullish on the outlook for equity markets, according to the BofA Merrill Lynch’s latest survey of fund managers.
The bank’s July survey found that a net 61% of global asset allocators are now overweight equities, which is the highest reading since early 2011 and represents the second most bullish stance in the survey’s history.
Merrill says that this aggressive positioning “reflects a significant increase in investors’ inflation expectations”, with a net 71% expecting global core consumer inflation to be higher in 12 months. “A growing number of investors now see inflation moving above trend levels while global growth remains below-trend,” it says, adding that investors also remain confident that the world economy will strengthen over the next year.
Still, the survey also found that a net 21% of investors are worried that stock markets are overvalued, which is the highest reading since 2000.
Other potential risks, such as the prospect of Chinese debt defaults, “asset manias”, and eurozone deflation have all faded since last month, Merrill says. Instead, it notes that the prospect of geopolitical crises is now seen as the greatest tail risk, and threat to financial market stability.
“Improving investor sentiment on global growth, inflation, equities and risk-taking are all testament to a potential macro normalization in the second half. This could eventually feed into a normalization of rates. If growth does pick up, volatility will rise too,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research.
In this environment, the appeal of European equities is declining, with just 10% now citing the region as the most attractive to overweight across the next year, down 11 percentage points from June. Investors’ appetite for exposure to the eurozone periphery is also declining, it notes with confidence in both debt and equities from the region down from the previous survey.
A total of 228 investors, with US$674 billion of assets under management, participated in the survey from July 3 to 10.