Weakening Expectations in China Limit Impact on Global Growth Outlook
Global investors are significantly more positive on the
outlook for Europe after the European Central Bank’s announcement of quantitative
easing to reflate the region’s economy, according to the BofA Merrill Lynch Fund
Manager Survey for February.
Europe’s profit outlook is at its best since 2009, according to panel members. A net
81 percent of regional specialists see the economy strengthening in the next year.
Against this background, a record net 51 percent make the region their top pick in
equities over a one-year horizon, up from January’s net 18 percent. A net 55 percent
are already overweight.
The U.S. has been the main loser from this rotation. Overweights on U.S. equities
have declined to a net 6 percent, down 18 points versus last month.
Overall, fund managers have increased their allocations both to stocks (a net 57
percent overweight, up six points month-on-month) and cash (a net 22 percent
overweight, a five-point rise). This is at the expense of bonds, which are now seen
as overvalued by a net 79 percent. Bonds are also perceived as the asset class most
vulnerable to increased volatility this year.
Despite exuberance over Europe, the global growth outlook is little changed. This
reflects declining expectations on China. A net 58 percent of respondents now
expect that country’s economy to weaken over the next 12 months, the survey’s
lowest reading on this measure in nearly two years.
“The ECB has successfully vanquished global deflation fears and induced the return
of reflation trades in February,” said Michael Hartnett, chief investment strategist at
BofA Merrill Lynch Research. “Sentiment has gotten ahead of the fundamentals on
European equities. It is as if there is not a single bear left. We will need to see a
strong recovery very soon to keep the bulls happy,” said Manish Kabra, European
equity and quantitative strategist.
Eurozone only
Investors’ new bullishness on Europe is strongly focused on the Eurozone. Non-Euro
markets are out of favor. Last month, France and Italy stood out as their worst picks,
but a net 42 percent of regional fund managers now intend to underweight the U.K.
and Switzerland this year. They have also shifted to a negative stance on Sweden.
Autos are now European regional investors’ favored sector. A net 26 percent are
overweight, a month-on-month gain of 12 percentage points. The travel and leisure
area has also gained support with a 10-point rise.
In contrast, banks and insurers saw notable declines in sentiment. Month-on-month
falls of 32 and 20 percentage points, respectively, have taken both into underweight
territory. Utilities are now the region’s least favored sector.
Inflation fuelled
Anxiety over potential Eurozone deflation has declined with the ECB’s QE
announcement. Indeed, inflation expectations are picking up. A net 29 percent of
fund managers expect global core CPI to be higher in a year’s time, up from a net 14
percent a month ago.
A potential geopolitical crisis is now clearly respondents’ major tail risk. One in three
identifies it as their major concern.
Gold glisters again
China’s weakening outlook is weighing on Global Emerging Markets equities, but net
underweights on GEMs have declined by 12 percentage points since January to a
net 1 percent.
Sentiment towards gold is also improving. Forty percent of survey participants expect
the price to be higher in 12 months’ time. Last month, bears on the precious metal
still outnumbered bulls.
Only a net 3 percent now considers gold overvalued, compared to a net 20 percent
as recently as December.
Many investors continue to see value in oil. A net 39 percent regard crude as
undervalued, down slightly from January’s reading.
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