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Fund manager sentiment moving against Europe in favour of US

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Investors have recovered their bullishness towards equity markets but are shifting their focus away from Europe and into the US and Japan, according to the BofA Merrill Lynch Survey of Fund Managers for March.

After weakened sentiment in February, investors have restored their faith in equities with a net 46 per cent of asset allocators saying they are overweight the asset class, up from 33 per cent the previous month.

Cash positions have fallen with respondents at a net neutral cash allocation compared with a net 12 per cent underweight in February, according to the BofA Merrill Lynch Global Research report.

Asset allocators have retrenched from Europe, however. A net 21 per cent are underweight European equities this month, up sharply from a net two per cent overweight in January.

The change in favour of US equities has been similar. A net 19 per cent of asset allocators are overweight US equities this month, up from just one per cent in January.

Japan is also regaining popularity. A net six per cent of allocators are overweight Japanese equities, the most bullish reading since August 2007, and up from a net ten per cent underweight in January.

Global investors believe that the corporate outlook is better away from Europe. A net 40 per cent of the panel says the outlook for eurozone corporate profits is the least favourable of all regions.

“Investors’ concerns about Greece are easing but European country risk remains a key constraint to optimism over economic recovery,” says Gary Baker, head of European equities strategy at BofA Merrill Lynch Research.

Against a backdrop of concerns over public sector deficits investors are showing greater bearishness about the macro economic outlook – but greater bullishness about companies.

The net number of European fund managers predicting growth in their own economy over the coming 12 months has fallen to 45 per cent, down from 72 per cent in January, according to the Regional Fund Manager Survey. While European sentiment might have been expected to weaken, a similar fall in optimism is also evident among US investors. A net 43 per cent forecast growth in the American economy over the next 12 months, down from a net 76 per cent in January.

Investors in both regions have stronger belief in earnings growth. A net 60 per cent of European respondents predict improved earnings in the coming 12 months, an increase of 11 per cent on February. Their colleagues in the US are more positive with a net 72 per cent forecasting earnings growth, up from a net 52 per cent in February.

US and European investors have significantly scaled back their cash allocations. A net nine per cent of the European panel is overweight cash this month, down from 26 per cent in February. The corresponding numbers for US investors are a net eight percent in March and 19 per cent in February, according to the report.

European respondents have increased exposure to cyclical sectors, including basic resources and construction. They have reduced their underweight position on banks. US investors have also increased exposure to cyclicals, such as industrials and materials, but have extended their underweight positions in banks.

Inflation expectations have fallen further and investors are seeing rate hikes as less likely. The net percentage of the global panel expecting inflation to increase in the next year has fallen to 34 per cent from 46 per cent in February and 61 per cent in January.

European investors have sharply scaled back their expectations of a rate hike by the European Central Bank before October 2010. Eighty-five per cent of European respondents are ruling out a hike before the fourth quarter, up from only 45 per cent in February.

The global panel views change in monetary policy as less of a threat to macro-economic stability. Less than half of respondents (48 per cent) describe monetary policy as an “above normal” risk, compared with 55 per cent in February. A net 58 per cent of global investors expect long-term interest rates to increase, compared with a net 65 per cent in February.

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