Fears about the possibility of tumbling off the fiscal cliff are easing, bolstering confidence in the global recovery, the latest BofA Merrill Lynch Fund Manager Survey finds.
The December survey says that a net 40% of institutional investors believe the global economy will strengthen in the year ahead, which is up six percentage points from last month, and double the reading two months ago. The number of investors viewing the U.S. fiscal cliff as the biggest tail risk has fallen to 47% from 54% in November; yet it remains the number one worry.
Confidence in emerging markets is surging once again, the survey finds, with optimism about China’s economy reaching the highest level on record. And, a net 38% of asset allocators are overweight emerging market equities, which is double the level of September’s survey.
“The bulls are back in China, while policy makers elsewhere put bears onto the back foot. If the bulls are to claim a decisive victory, we need hard evidence that the economy is reaccelerating,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
The survey reports that the number of asset allocators who are overweight U.S. equities has fallen since November, and allocations to the eurozone are outweighing U.S. allocations for the first time since November 2010. Also, allocations to cyclical sectors such as consumer discretionary stocks and industrials have increased, and the market is firmly overweight both. The number one sector remains pharmaceuticals, it reports.
Additionally, the outlook for corporate performance has improved for the third successive month and more investors are calling for companies to raise capital expenditure, the survey says. It reports that a net 11% of investors believe profits will improve in the coming 12 months, back in October, a net 11% were forecasting lower profits. Also, the proportion of investors predicting worsening margins has fallen to a net 27%, down from a net 33% a month ago and a net 44% in October, it says.
Moreover, the December survey shows reduced skepticism over companies’ ability to deliver double-digit profit growth. A net 37% believes global corporate earnings growth will be less than 10%, down from a net 52% in November.
And, it says that a net 64% of the panel believes that companies around the world are under-investing, which is the highest reading in the history of the survey. Investors are less worried about dividends and buybacks too, it notes.
Emerging market equities are the top choice, with a net 38% saying they have the best outlook for corporate profits in the coming year.
Finally, investors also say that liquidity conditions are at their best since May of this year. The proportion of respondents rating liquidity conditions as ‘positive’ rose to a net 23% in the month, up from a net 13% in November. This marks the third successive month of improving liquidity ratings and follows efforts to support market liquidity by central banks, including recent rounds of quantitative easing by the Fed, the firm says.
A total of 255 panelists with US$664 billion of assets under management participated in the survey from December 7 to 13.