Institutional investors are increasingly seeking refuge from the eurozone in U.S. and emerging market equities, finds the latest BofA Merrill Lynch survey of fund managers.
The firm reports that fund managers have slightly increased their exposure to equities generally since October’s survey, and a net 5% of the panel is now underweight equities, down from 7% a month ago. The proportion of investors overweight U.S. equities rose sharply to a net 20%, from a net 6% in October, it says.
Additionally, global emerging markets are now being overweighted by a net 27% of investors, up from a net 9% last month. The eurozone remains the least popular region, but the proportion of investors underweight eurozone equities ticked down just one percentage point to a net 30%, it says.
In fact, the firm reports that gloom within the eurozone has intensified. The proportion of Europeans forecasting regional recession has almost doubled, it says, with a net 72% of European respondents now believing Europe will experience recession in the coming 12 months, up from a net 37% in October.
Conversely, fears of a global recession have eased. A net 31% of investors now expect the world economy to avoid a recession, up from a net 25% last month.
“Investors are showing belief in emerging market growth and U.S. resilience, which is key to retaining positive global sentiment,” said Michael Hartnett, chief global equities strategist at BofA Merrill Lynch Research.
The increased exposure to emerging market equities is being driven by an increased faith in the resilience of China’s economy, Merrill notes. More than three-quarters of the panel (78%) expect a soft landing for China’s economy, with China delivering better than 7% growth during the year. The proportion of regional investors believing that China’s economy will weaken in the coming year has fallen to a net 25% from a net 47% in October.
Additionally, the firm says that fears of higher inflation, which have cast a shadow over emerging markets in recent months, have eased since September.
Investors’ greater belief in emerging markets is also being reflected in increased allocations to commodities and commodity-related equities, it says. Global asset allocators have moved from underweight commodities in October to neutral this month. The biggest positive swings in equity allocations were in energy and materials, it says.
And, for the first time since March 2009, investors are predicting that short-term rates will fall in the next 12 months, Merrill says. A net 5% of the panel says rates will be lower a year from now, compared with a net 9% predicting higher rates last month, which it says, is “a potential signal that as concerns about inflation in emerging markets erode, the question of deflation could be on investors’ minds.”
Despite more positive sentiment towards U.S. equities this month, a small majority of the panel expect the U.S. to receive a further debt rating downgrade, the survey reports. Now, 53% of the global panel believes another downgrade could take place before the end of 2013, with 36% predicting a change in 2012.
Overall, 258 panelists with US$665 billion of assets under management participated in the survey from November 4 to 10.