BofA Merrill Lynch Fund Manager Survey Finds Investors Bullish on Global Growth as They Look Beyond Fiscal Cliff

A net 40 percent of investors believe the global economy will strengthen in the year ahead, a rise of six percentage points month-on-month and double the reading two months ago. The number of investors viewing the U.S. fiscal cliff as the biggest tail risk has fallen to 47 percent, down from 54 percent in November. Despite this fall, however, the fiscal cliff remains the number one worry.

Emerging markets are the preferred region for the panel. Optimism about China’s economy has reached the highest level recorded by this survey. A net 67 percent of the regional survey respondents say China’s economy will strengthen in the coming year, up from a net 51 percent in October.

A net 38 percent of asset allocators are overweight emerging market equities, double the level of September’s survey.

“The bulls are back in China, while policy makers elsewhere put bears onto the back foot. If the bulls are to claim a decisive victory, we need hard evidence that the economy is reaccelerating,” Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research said. “Growth expectations and positioning are converging to mid-range levels, but many still think earnings expectations are too high. When these concerns subside, it’s likely that cheap valuations of European stocks will attract global fund managers,” said John Bilton, European investment strategist.

The number of asset allocators overweight U.S. equities has fallen since November. But allocations to the eurozone are outweighing U.S. allocations for the first time since November 2010. The net percentage of asset allocators overweight eurozone equities has risen to seven, up from a net 1 percent in November. In terms of sector, investors have maintained a broadly “risk on” stance – allocations to cyclical sectors Consumer Discretionary and Industrials have increased, and the market is firmly overweight both. But the number one sector remains Pharmaceuticals.

Third successive month of rising sentiment towards corporate profits

The outlook for corporate performance has improved for the third successive month and more investors are calling for companies to raise capital expenditure. A net 11 percent of investors believe profits will improve in the coming 12 months – a 22-point swing from October when a net 11 percent were forecasting lower profits.

Pessimism about corporate margins has lessened for the third successive month. The proportion of investors predicting worsening margins has fallen to a net 27 percent, down from a net 33 percent a month ago and a net 44 percent in October. Similarly, December’s survey shows reduced skepticism over corporates’ ability to deliver double-digit profit growth. A net 37 percent believes global corporate earnings growth will be less than 10 percent, down from a net 52 percent in November.

A net 64 percent of the panel believes that companies around the world are under-investing, the highest reading in the history of the survey and an increase from a net 59 percent month-on-month. Investors are less worried about dividends and buybacks – the proportion saying that payouts are too low has fallen to net 28 percent from a net 34 percent.

Emerging market corporates have consolidated their position as the panel’s favorite.

A net 38 percent of investors say that Global Emerging Market equities have the best outlook for corporate profits in the coming year, up from a net 32 percent in November.

Japan sentiment rises at home and globally

Global investors’ caution towards Japan has eased, while domestic optimism has strengthened. The proportion of global asset allocators underweight Japanese equities has fallen to a net 20 percent, down from a net 34 percent a month ago.

A net 17 percent of the global panel would like to underweight Japanese equities in the coming year, but that’s less than the net 30 percent taking that view in November. A net 90 percent of Japanese investors expect the economy to strengthen in the coming year, compared with a net 18 percent in November, while a net 81 percent is forecasting improved earnings in the coming 12 months.

Liquidity conditions improve

Investors say that liquidity conditions are at their best since May of this year. The proportion of respondents rating liquidity conditions as “positive” rose to a net 23 percent, up from a net 13 percent in November. This marks the third successive month of improving liquidity ratings and follows efforts to support market liquidity by central banks, including recent rounds of quantitative easing by the Fed.