Investors are returning to Europe as they retreat from emerging market and Japanese equities, according to the BofA Merrill Lynch Fund Manager Survey for June.
Investor confidence has risen in the past month in spite of market instability and a 2.5 per cent fall in world equities over the survey period. A net 56 per cent of global investors believe the world economy will strengthen over the coming year, up from a net 48 per cent in May. Equity allocations increased. A net 48 per cent of asset allocators are overweight equities, compared with a net 41 per cent in May.
But while allocations to the eurozone and US rose, investment in global emerging market equities fell to their lowest since December 2008. A net nine per cent of asset allocators are now underweight emerging market equities – the first underweight reading since 2009 and down from a net three per cent overweight reading last month. Investors now identify a China hard landing as the greatest tail risk – more of a concern than eurozone sovereigns or banks. A net 31 per cent of regional fund managers say that China’s economy will weaken in the coming 12 months, compared with a net eight per cent expressing that view in May.
A net 25 per cent of the global panel say that emerging markets is the region they would most like to underweight in the coming 12 months – the lowest ever reading. Allocations to commodities have also reached a record low with a net 32 per cent of asset allocators holding underweight positions.
“The biggest contrarian play in the market today is assets linked to China. The lows in emerging market equity and commodity allocations suggest the market has over-positioned itself for a shock from China,” says Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
“Investors can now see a certain level of stability returning to Europe’s economy and positioning for a recovery has started,” says John Bilton, European investment strategist.
Seeds of optimism in Europe evident in last month’s survey have flourished. A net six per cent of global asset allocators are overweight eurozone equities, representing a 14 percentage point swing from May when a net eight per cent were underweight. Last month a net 13 per cent selected the eurozone as the region they would most like to underweight in the coming year. That reading has now fallen to a net one per cent.
But it’s inside Europe that optimism has risen the most. A net 45 per cent of European respondents to the regional survey expect Europe’s economy to strengthen in the coming year, up from a net 24 per cent last month. Expectations of European recession in the coming year have fallen sharply.
Equity allocations increased month-on-month across 13 of the 19 sectors assessed in Europe. The greatest positive swings came in telecoms, financial services, banks and chemicals. A net three per cent of European investors are now overweight Telecoms compared with a net 24 per cent underweight in May. A similar net underweight position was wiped out in financial services over the month. A net 18 per cent of respondents are now overweight banks, after the market was net neutral a month ago.
June’s Fund Manager Survey offers further evidence of the great rotation from bonds to equities. As overall equity allocations rose month-on-month, investors extended their underweight positions in bonds. A net 50 per cent of asset allocators say they are underweight bonds in June, up from a net 38 per cent in May.
Furthermore, expectation of higher long-term yields has reached the highest level recorded by the survey since 2004. The proportion of the global panel forecasting higher long-term rates in 12 months’ time leapt to a net 81 per cent from a net 55 per cent last month. Only four per cent of the panel see rates falling. At the same time the proportion forecasting higher short term rates also soared, up to a net 43 per cent from a net 14 per cent in May.
Fear that Abenomics – Japan’s three-pronged stimulus plan – will fail has become investors’ second biggest tail risk after China and interrupted the strong run in Japanese equities. The proportion of asset allocators overweight Japanese equities has fallen to a net 17 per cent from May’s seven-year high of a net 31 per cent. The proportion of investors viewing Japan as the region they most want to overweight has fallen to a net 16 per cent from a net 25 per cent. A net 11 per cent of regional survey respondents say Japan’s fiscal policy is “too restrictive”.
An overall total of 248 panellists with USD708bn of assets under management participated in the survey from 7 June to 13 June. A total of 190 managers, managing USD572bn, participated in the global survey. A total of 124 managers, managing USD282bn, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS.