US equities are the primary beneficiary of the continuing upswing in global investor sentiment, according to the BofA Merrill Lynch survey of fund managers for December.
A net 44 per cent of the respondents predict the world’s economy to strengthen in 2011, compared to 35 per cent a month earlier.
A net 51 per cent anticipate corporate profits improving next year, up from 36 per cent in November.
At the same time more investors believe that inflation is likely to rise with a net 61 per cent of the panel forecasting higher core inflation in 2011.
With Europe’s sovereign debt crisis continuing, investors are turning to US equities. A net 16 per cent of asset allocators are overweight US stocks up from a net one per cent in November. A net four per cent are underweight eurozone equities, compared with a net 15 per cent overweight in November.
Bullishness towards the US dollar is evident with a sharp increase in the number of investors forecasting dollar appreciation. A net 36 per cent expect the dollar to make gains in 2011 up from a net 14 per cent in November. In the US regional survey, the net percentage of US investors expecting double-digit profit growth has doubled month-on-month to 40 per cent.
“Despite rising confidence in global growth, the survey shows that Europe is losing investor support as political procrastination and banking concerns overshadow a strong corporate outlook,” says Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research.
Global investors are giving corporates the green light to step up capital expenditure. A net 62 per cent of the panel say that companies are broadly under-investing – the highest such reading since the survey started posing the question in August 2005.
Investors’ number one preference for use of cash has switched to capital spending with 45 per cent of the panel prioritizing it. In November “returning cash to shareholders” was top choice. Investors are also increasingly convinced that companies should borrow more. A net 44 per cent of respondents believe corporate balance sheets are under leveraged, compared with a net 41 per cent in November.
Energy has dislodged technology from its pedestal as the world’s favourite stock sector for the first time in a year. Technology had been the top pick for 11 consecutive months since January. A net 38 per cent of asset allocators are overweight energy, up sharply from a net 24 per cent in November. A net 34 per cent of the panel is overweight technology, a monthly fall of one percentage point. A second large gainer was materials, with an extra eight per cent of respondents moving to overweight positions. Both energy and materials are sectors that traditionally benefit from rising inflation.
Banks lost further ground, with a net 28 per cent of global investors underweight the sector. European investors were especially fast to move out of bank stocks. A net 47 per cent of European respondents are now underweight banks, up from a net 22 per cent in November.
Aside from their mass movement out of financial stocks, European investors are keeping cool heads. A net 26 per cent of European respondents expect the region’s economy to improve in 2011, up from a net 23 per cent in November. A net 34 per cent are forecasting earnings per share to grow next year, compared with a net 29 per cent a month previously.
Cash holdings in the region have ticked upwards, but only modestly, with average cash positions up by 0.1 per cent to 3.0 per cent of a portfolio month-on-month.
“Europeans are looking beyond the noisy process of politics, but believe that a solution to the sovereign debt crisis will be found, and that economic growth and corporate profits will progress in the coming year,” says Patrik Schöwitz, European equities strategist at BofA Merrill Lynch Global Research.
