Notwithstanding recent market volatility, fund managers are increasingly putting their cash to work, according to the BofA Merrill Lynch Fund Manager Survey for January.
The survey finds that institutional investors are less optimistic about the global economy. It reports that a net 51% now believe that the world economy will improve this year, down from 60% in December. And, in this environment, fund managers are increasingly concerned about the prospects for corporate profits and margins. The survey found that a net 8 % now expect corporate operating margins to fall in the coming 12 months, up from 1% in December. And, the proportion of the panel expecting corporate profits to improve has fallen to a net 38% from 46%.
The firm says that only a “small minority” of investors now believes that a double-digit rise in profits is possible in the coming year. Instead, a net 53% now say that it is unlikely profits will improve by 10% or more this year, up from 32% in December.
Despite this gloomier assessment of global growth and corporate profit prospects, investors are nevertheless putting their cash to work, the survey found. It reports that the proportion of respondents that are overweight cash has dropped to a net 17% from 28% last month. And, average cash positions have fallen to 4.5% of portfolios, the lowest in six months, down from 5.0% in December.
The survey found that more than two-thirds of investors say equities will outperform other major asset classes in 2015. And, it says that a net 51% of asset allocators are overweight equities. Within the asset class, U.S. equities are gaining favour, with a net 24% overweight U.S. equities, up from a net 16% a month ago. However, a net 75% also say that U.S. equities are overvalued.
At the same time, the proportion of investors that are overweight real estate has climbed six percentage points to a net 9%, Merrill reports. And, it says that investors have also reduced their net underweight positions in bonds.
One factor that may be stoking these moves is the anticipation of further monetary stimulus from the European Central Bank (ECB). Merrill reports that 72% are predicting quantitative easing (QE) will start in the first quarter. And, U.S. rate hike expectations have now been pushed out to the third quarter, instead of the second quarter, which was the expectation a month ago.
“Lower oil prices and hopes for policy stimulus are sustaining both global growth expectations and investor confidence,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
Investors see value in oil and in energy stocks, Merrill says, with a net 45% saying that oil is undervalued, up from 36% in December. And, it says that a net 30% says that energy stocks are the most undervalued.
Yet, despite this conviction, investors aren’t ready to put their money there at this point. The survey found that the proportion of investors underweight energy stocks has increased in the past month to a net 25%. And, while asset allocators have modestly increased their allocations to commodities, a net 24% remains underweight.
Merrill also reports that emerging markets have fallen further out of favour with global investors. “With questions hanging over China’s economy, bearishness towards global emerging market (GEM) equities has intensified,” it says. It reports that a net 13% are now underweight the sector, compared with a net 1% being overweight in December. And, it reports that a net 17% of investors say that emerging markets is the region they most want to underweight in the coming year.
A total of 219 panelists with US$630 billion of assets under management participated in the survey from January 9 to 15.