BofA Merrill Lynch Fund Manager Survey Finds Bearish Sentiment Waning as Risk Appetite Improves

Bearish sentiment among investors about the outlook for the global economy and corporate earnings has eased, according to the BofA Merrill Lynch Survey of Fund Managers for August.

The survey shows a net 5 percent of respondents predicting that the global economy will improve in the next year. This represents a modest turnaround from July when a net 12 percent of respondents predicted the world economy would deteriorate.
While the percentage of respondents expecting below-trend growth and inflation remained unchanged at 73 percent in August, the survey shows recession fears easing. A net 78 percent of respondents think a double-dip recession is unlikely. After a deflation shock last month, investors have shifted their focus back towards inflation.

The survey shows an almost neutral view on the prospects for a rise in global inflation in the next year. Just 1 percent of respondents expect inflation to be lower in 12 months’ time, compared to a net 12 percent in July. In addition, a net 14 percent of asset allocators indicated that global monetary policy is too stimulative, compared to just 5 percent in July. Nonetheless, 55 percent of respondents to the global survey are ruling out any rate hike in the U.S. before the third quarter of 2011.

A key indicator tracking investors’ risk and liquidity conditions returned to an almost neutral reading, indicating an improvement in sentiment.

“The spotlight of investor pessimism has shifted away from China and Europe to Japan and the U.S. Investors clearly remain cautious, so better news on U.S. growth and fiscal policy would be a pleasant surprise,” said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Global Research.

“Investor sentiment on Europe has staged a remarkable recovery in the past few months, underpinned by greater optimism about Europe’s banks. Economic data now has to continue to support this shift,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.

Appetite for European equities returns

Asset allocators reduced their cash holdings. A net 7 percent were overweight cash in August, compared to 13 percent in July and 19 percent in June. While there was an uptick in allocation to equities, there was a drop in allocation to bonds. A net 23 percent were underweight bonds in August, compared to a net 15 percent underweight in July.

The survey also shows a sharp drop in investors’ appetite for U.S. and Japanese equities, but a recovery in demand for Eurozone equities.

A net 14 percent of asset allocators are underweight U.S. equities, compared to 7 percent overweight in July. Global asset allocators have also reduced their exposure to Japanese equities. A net 27 percent were underweight Japanese equities in August, compared to a net 7 percent in June.

In contrast, a net 11 percent were overweight eurozone equities in August, the most positive reading since October 2009. This compares to a net 10 percent who were underweight a month earlier. There was also good news for U.K. equities, on which investors are the most optimistic they have been since May 2007.

Bearish sentiment on China recedes

Global Emerging Markets (GEM) increased in popularity as concerns about a weakening of the Chinese economy waned. A net 38 percent of global asset allocators are overweight GEM equities, up from 34 percent in July and 31 percent in June.

Bearish sentiment towards the Chinese economy eased markedly. A net 19 percent of respondents expect the Chinese economy to weaken over the next year, compared to 39 percent just a month ago. This improved sentiment was supported by a shift towards commodities. A net 9 percent of respondents were overweight commodities in August, compared to a net 1 percent underweight in July.

Banks, consistently one of the most unloved sectors, finally saw a sharp improvement from a net 28 percent underweight in July to a net 19 percent underweight this month. This ranked alongside industrials as the biggest sector shift by investors. On the other hand, utilities and pharmaceuticals suffered steep declines in support.

U.S. dollar looks cheap; Japanese yen overvalued

The survey reveals that asset allocators think the U.S. dollar looks undervalued, while the Japanese yen is seen as overvalued. A net 23 percent of respondents regard the dollar as undervalued, compared to just 3 percent in July. A net 62 percent see the yen as overvalued – a survey record – versus 55 percent a month earlier.

Survey of Fund Managers

A total of 187 fund managers, managing a total of US$513 billion, participated in the global survey from 6 August to 12 August. A total of 157 managers, managing US$327 billion participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Global Research with the help of market research company TNS. Through its international network in more than 50 countries, TNS provides market information services in over 80 countries to national and multi-national organizations. It is ranked as the fourth-largest market information group in the world.

The BofA Merrill Lynch Global Research franchise covers over 3,100 stocks globally and ranks in the top tier in many external surveys. Most recently, the group was named 2010 Top Global Broker (second consecutive year), Top Europe Broker, No. 2 U.S. Broker and No. 3 Asia broker by Financial Times/StarMine. The team was also named Best Brokerage by Forbes/Zacks for the second consecutive year. In addition, the group was named No. 1 in the 2010 Institutional Investor All-Emerging Europe Research team survey and No. 3 in the 2010 Institutional Investor All-Europe team survey for pan-European coverage. In 2009, the team was named No. 2 in the Institutional Investor 2009 All-Brazil Research team survey; and No. 3 in the 2009 Institutional Investor 2009 All-America Equity, All-Latin America and All-America Fixed-Income Research team surveys.

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