Equities to be the best performing asset in 2015; deflation is the biggest risk: BofA-ML

The fund manager survey for November sees equities to be the best performing asset class in 2015; deflation is the biggest risk

Despite growth slowing in major economies such as China and the euro zone, and Japan slipping into recession, the Bank of America Merrill Lynch (BofA-ML) Fund Manager Survey for November expects global growth to pick up. According to the survey, a net 47 per cent of the global panel expects the economy to strengthen in the coming year, compared with 33 per cent in October.

A total of 214 panellists, with $569 billion of assets under management, participated in the survey, carried out during November 7-13.

In the survey, 63 per cent of the respondents expected equities to be the best performing asset class in 2015, followed by currencies and commodities. Net hedge fund exposure to stocks in November was the highest in 18 months, the survey showed.

BULLISH OUTLOOK

• 47% of the respondents expect the global economy to strengthen in 2015, compared with 33% in October
• 71% fund managers felt deflation was the biggest risk in 2015, compared to inflation (16%)
• 27% said Japan was the country they were most likely to be overweight on in 2015
• 17% believed Japanese equities were the most undervalued globally
• 49% said they were keen on buying German stocks, against 13% in October

A total of 71 per cent fund managers felt deflation was the biggest risk in 2015, compared to inflation (16 per cent). “Big tail risks are euro zone deflation (29 per cent), geopolitics (21 per cent) and China debt defaults (19 per cent),” the survey said.

Just before Japan slipped into recession, optimism on that country stood at its highest since 2005, with a net 27 per cent of the respondents saying Japan was the country they were most likely to be overweight on in the next 12 months, compared with 14 per cent in October.

This month, Bank of Japan increased the purchases of Japanese government bonds and on Tuesday, Japan’s prime minister, Shinzo Abe, called for snap elections and postponed a rise in sales tax.

<B>Japanese equities most undervalued</B>
Conviction on Japan, the BofA-ML survey said, appeared to be underpinned by a belief in the profit outlook and a view that the country’s stocks were undervalued. A net 26 per cent of the respondents said Japan had the most favourable profit outlook for the year ahead, a rise of 10 percentage points compared to the October survey. Of the overall respondents, 17 per cent believed Japanese equities were the most undervalued globally.

A net 57 per cent of the respondents expect the yen to fall on a trade-weighted basis.

“Deflation might be at the back of investors’ minds, but taking on risk, especially in equities, in Japan and in the dollar is at the forefront of their thinking,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research.

Within global emerging markets and Asia, India remains the most preferred region. Within the Asia-Pacific investors also favour the Philippines, China, New Zealand and Malaysia.

A net eight per cent of the respondents were overweight on Europe, compared with four per cent in October. The November survey also saw a jump in the number of those seeking to buy German stocks (net 49 per cent, against 13 per cent in October); in this segment, Germany topped the list (Spain was most favoured last month). France remained the least favoured for the fourth consecutive month (27 per cent were underweight on French equities).

“Confidence in European economic growth rose from a net 16 per cent in October to 38 per cent this month. This comes amid increased optimism in ECB (European Central Bank) policy aggression, following ECB announcements,” the survey said.