Institutional investors are back to hoping that policymakers will intervene to support a faltering recovery, reports the BofA Merrill Lynch Survey of Fund Managers for June.
The latest survey found that views on the economy have weakened. A net 11% of investors surveyed now believes that the global economy will deteriorate in the coming 12 months, which is the weakest reading so far this year. Last month, a net 15% believed the economy would strengthen. The firm says that the negative swing of 26 percentage points is the biggest since July-August 2011 as the sovereign crisis built.
Additionally, the survey found that the outlook for corporate profits has suffered a similarly negative swing. A net 19% now believes that corporate profits will fall in the coming 12 months. Last month, a net 1% saw improving corporate profits.
Amid this gloomier outlook, investors are shunning risk assets. The survey found that average cash balances are at their highest level since the depth of the credit crisis in January 2009, at 5.3% of portfolios, up from 4.7% in May.
Asset allocators have also moved to a net underweight position in global equities and increased bond allocations, it reports. A net 4% are now underweight global equities, compared with a net 16% overweight last month. And, they reduced their underweight position in bonds to a net 23%, down from a net 33% in May.
So, investors are looking once again at policymakers to provide more economic stimulus. The latest survey found that the majority of investors now believes that global monetary policy is ‘too restrictive’. The highest reading for that belief since December 2008. Back in May, a net 15% said policy was ‘too stimulative’. And, the proportion of global investors saying global fiscal policy is ‘too restrictive’ has also continued to rise.
“Hopes expressed last month of a policy response have now become expectations. Markets are keenly anticipating decisive action from key policy meetings in June,” said Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.
In the meantime, investors are seeing global equities as undervalued. The survey reports that a net 48% now believes global equities are undervalued, matching the lowest level since the survey began. And, a net 83% says that bonds are overvalued, which is also an all-time high, up from a net 74% a month ago.
“Investors have taken extreme ‘risk off’ positions and equities are oversold, but we have yet to see full capitulation. Low allocations in Europe are in line with perceptions of growing risk levels in the eurozone,” said Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research.
Additionally, the survey reports that last month’s growing optimism about China’s economy has come to a halt. The panel is now equally split about whether China’s economy will get stronger or weaker in the year ahead. Last month, a net 10% predicted it would strengthen. And, 16% now believe China’s economy faces a ‘hard landing’, up from 9% in May.
Moreover, sentiment towards emerging markets generally has softened, it says. A net 17% of global asset allocators are now overweight global emerging market equities, down from a net 34% in May. Commodities have also lost favour, it says, with a net 8% underweight the asset class.
A total of 260 investors with US$689 billion of assets under management participated in the survey from May 31 to June 7.