The overall global outlook is little changed, but fund managers are much more bullish on Europe, given the European Central Bank’s (ECB) promise of more monetary stimulus, the latest edition of the BofA Merrill Lynch Fund Manager Survey finds.
Merrill’s survey of global fund managers for February finds them significantly more positive on the outlook for Europe, following the ECB’s plans for quantitative easing to reflate the region’s economy. It reports that the profit outlook is at its best level since 2009, with a net 81% of regional specialists seeing the economy strengthening in the next year. And, a record 51% now rate Europe as their top pick in equities for a one-year time horizon, up from January’s net 18%; and, it says that a net 55% are already overweight on European stocks.
The U.S. has been the main loser from this rotation, Merrill says. It notes that overweights on U.S. equities have declined to a net 6%, which is down 18 points versus last month.
“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,” added Manish Kabra, European equity and quantitative strategist.
In terms of overall asset allocation, Merrill says that fund managers have increased their allocations to both stocks and case, at the expense of bonds. A net 57% are now overweight stocks, up six points from last month, and a net 22% are overweight cash, which represents a five-point rise. Whereas bonds are now seen as overvalued by a net 79%, it says; and, bonds are also perceived as the asset class most vulnerable to increased volatility this year.
Despite this bullishness on Europe, Merrill reports that the global growth outlook is little changed. “This reflects declining expectations on China,” it says; as a net 58% of fund managers now expect that country’s economy to weaken over the next 12 months. China’s weakening outlook is weighing on global emerging markets (GEM) equities, Merrill says.
Finally, Merrill reports that fund managers sentiment towards gold is improving. Also, investors are seeing value in oil, it says, with a net 39% seeing crude as undervalued.
“A potential geopolitical crisis is now clearly respondents’ major tail risk,” it notes, adding that one in three respondents identifies it as their major concern.
A total of 196 panelists with US$559 billion of assets under management participated in the survey from February 6 to 12.