Broader optimism about the global economy and equity markets is emerging amid growing confidence in the outlook for China’s economy, according to the BofA Merrill Lynch Fund Manager Survey for November.
The survey suggests that optimism in the global economy is outweighing fears surrounding the U.S. fiscal cliff. A net 34% of the panel believes the world economy will strengthen in the next 12 months, which is its highest level since February 2011, and represents a monthly rise of 14 percentage points. A growing number of investors view the U.S. fiscal cliff as the biggest tail risk, it says.
Corporate profit expectations also rose significantly for the second successive month, the survey notes. A net 4% of investors believe the outlook for profits will improve in the coming 12 months. Two months ago, a net 28% were predicting a worsening in corporate profits. Also, equity allocations are rising, and 42% of the panel says they will opt to sell government bonds to make way for higher beta equities, up from 37% in October.
“Momentum has gathered behind the idea that we are on the cusp of a ‘great rotation’ out of bonds and into equities. The only missing ingredient is a resolution to the U.S. fiscal cliff,” says Michael Hartnett, chief investment strategist at BofA Merrill Lynch.
Indeed, the firm notes that November’s survey suggests that the rotation out of bonds and into equities could be underway. Asset allocators have, for the fifth successive month, increased allocations to equities, while reducing bond positions. A net 35% are now overweight equities, compared with a net 25% in October. And, a net 35% of asset allocators are underweight bonds, up from 26% a month ago. Also, more investors are looking for higher interest rates as inflation expectations inch upwards.
Apart from increased equity allocations, there are few signs of risk taking in other asset classes, the firm says. Allocations to commodities are down this month, allocations to real estate are unchanged, and the proportion of allocators overweight alternative assets also ticked upwards by a two percentage points to a net 9%.
Within equities though, investors are seeking greater exposure to emerging markets. A net 37% of asset allocators are overweight global emerging market equities, up from a net 32% in October. And, a net 30% of investors say that global emerging markets is the region that they would most like to overweight in the coming year, up from a net 22% last month.
An overall total of 248 panelists with US$695 billion of assets under management participated in the survey from November 2 to 8.