Investors more optimistic about global growth: BofA-Merrill Lynch

Biggest tail-risk to global growth remains China hard landing and commodity collapse. Investors maintain underweight stance on India

Investors are more optimistic about global growth prospects, especially in the US and Europe. The proportion of investors who believe the global economy will strengthen in 2014 rising to a net 75 per cent from a net 71 per cent in December, continuing a trend of rising optimism that started in late 2012 suggests the Bank of America- Merrill Lynch (BofA-Merrill Lynch) Fund Manager Survey for January.

This optimism is reflected in rising expectations for corporate profits, with a net 48 per cent looking for an improvement, up from a net 41 per cent in December. An overall total of 234 panelists with $653 billion of assets under management participated in the survey conducted by BofA Merrill Lynch Research with the help of market research company TNS.

Investors also seem upbeat about the road ahead for equities as an asset class, with a net 55 per cent saying they’re overweight on equities, continuing a trend which started in mid-2012, when a net four per cent were underweight equities. This is despite seven per cent of the respondents who believe equity markets are overvalued, the highest reading since 2000. The overvaluation view is driven predominantly by the views on US equities, where a net 72 per cent say stocks are overvalued.

This appetite for risk is also reflected in investors’ preferred sectors – technology, industrials and banks top their overweight lists, while utilities, staples and telecoms languish in underweight territory, the survey findings suggest.

Emerging markets
Against the broader global background of rising optimism from growth and profits, Global Emerging Markets (GEMs) remain out of favour. A net 61 per cent of the respondents expect a sharp deterioration in profits in GEM equities, up from net 32 per cent expecting the same in December. Furthermore, investors believe the biggest “tail risk” to the global outlook is a China hard landing and commodity collapse.

“The weakest profit outlook for GEM in the history of our data means that investor positioning is at or close to record underweight in Thailand, Indonesia, Turkey, South Africa, and Brazil. Investors continue to play the BRIC barbell with a large overweight in Russia versus an underweight stance in India and Brazil,” the report says.

Russia has been the most loved GEM country for the past eight months. Allocations towards Russia remain strong with a net 64 per cent of investors overweight the country in January.