Global economy will strengthen in 2013: BofA-ML

Fiscal cliff top concern emerging markets a preferred region, findings suggest

Confidence in a recovering global economy is extending to 2013 as investor fears surrounding the fiscal cliff eased, says a Bank of America-Merrill Lynch (BofA-ML) Fund Manager Survey for December.

A net 40 per cent of investors believe the global economy will strengthen in the year ahead, a rise of six percentage points month-on-month (m-o-m) and double the reading two months ago, the findings suggest. The number of investors viewing the US fiscal cliff as the biggest tail risk has fallen to 47 per cent from 54 per cent in November. However, it is still the numero uno concern.

Fiscal cliff refers to the tax increases and spending cuts that will hit America’s economy at the start of 2013 unless politicians agree to avert them.
 

BULLISH OUTLOOK
A net 40 per cent of investors believe the global economy will strengthen in the year ahead

• The number of investors viewing the US fiscal cliff as the biggest tail risk has fallen to 47% from 54% in November
• A net 67% of the regional survey respondents say China’s economy will strengthen in the coming year
• 38% of investors say global emerging market equities have the best outlook for corporate profits in the coming year

In the Asia Pacific region, investors have raised their allocations to cyclicals and cut exposure to defensives in December with autos being the most favoured sector, the survey findings point out. Fund managers raised their allocations to energy and basic materials. “The outlook for Australia continued to improve, but the country is still tied with India as the most underweight,” the findings suggest.

An overall total of 255 panelists with $664 billion of assets under management (AUM) participated in the survey held during December 7-13, carried out by BofA Merrill Lynch Research with the help of market research company TNS.

Preferred region
Emerging markets (EMs) is the preferred region for the panel. A net 67 per cent of the regional survey respondents (135 managers, managing $305 billion, participated in the regional surveys) say China’s economy will strengthen in the coming year, up from a net 51 per cent in October.

“The bulls are back in China, while policy makers elsewhere put bears onto the backfoot. If the bulls are to claim a decisive victory, we need hard evidence that the economy is reaccelerating,” Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, said.

Emerging market corporates have consolidated their position as the panel’s favourite. A net 38 per cent of investors say global emerging market equities have the best outlook for corporate profits in the coming year, up from a net 32 per cent in November.

A net 17 per cent of the global panel would like to underweight Japanese equities in the coming year, but that’s less than the net 30 per cent taking that view in November. A net 90 per cent of Japanese investors expect the economy to strengthen in the coming year, compared with a net 18 per cent in November, while a net 81 per cent is forecasting improved earnings in the coming 12 months.

Investors say liquidity conditions are at their best since May this year. The proportion of respondents rating liquidity conditions as “positive” rose to a net 23 per cent, up from a net 13 per cent in November.

The number of asset allocators overweight US equities has fallen since November. However, allocations to the Euro zone are outweighing US allocations for the first time since November 2010. In terms of sectors, investors have maintained a broadly “risk-on” stance – allocations to cyclical sectors consumer discretionary and industrials have increased, and the market is firmly overweight, both the survey findings suggest, with pharmaceuticals as the preferred investment option and the least favourite being utilities.

Corporate profits
The outlook for corporate performance has improved for the third successive month and more investors are calling for companies to raise capital expenditure, the survey states. A net 11 per cent of investors believe profits will improve in the coming 12 months – a 22-point swing from October when a net 11 per cent were forecasting lower profits.

A net 37 per cent believes global corporate earnings growth will be less than 10 per cent, down from a net 52 per cent in November. A net 64 per cent of the panel believes that companies around the world are under-investing, the highest reading in the history of the survey and an increase from a net 59 per cent m-o-m.