Investors raise allocation to banks as global growth optimism grows

Investor expectations of global growth have jumped to 19-month high, says a BofA-ML survey

Global fund managers have hiked allocation to banks with a net 31% of them overweight the banking sector in December as compared to 25% in the previous month, suggests a Bank of America - Merrill Lynch (BofA-ML) Fund Manager Survey for December.

A hike in allocation to the banking sector comes in the backdrop of growing optimism for global growth.

According to the survey, investor expectations of global growth have jumped to 19-month high with a net 57% of fund managers expecting growth to improve in the next 12 months, as compared to 35% of fund managers who thought so in November.

The survey, which was conducted during the period 2 December to 8 December, quizzed a total of 211 panellists with $568 billion of assets under management (AUM).

With a net 56% of investors thinking global profits will improve in the next 12 months, fund managers are more optimistic about corporate profit expectations in six-and-a-half years. Majority of investors (54%) think the rotation to cyclical styles and inflationary sectors will continue well into 2017 - up from 44% last month. Cash levels with investors, on the other hand, continue to fall and touched 4.8% in December from 5% in November and 5.8% in October.

Investors identify EU disintegration and a bond crash as the two most commonly cited tail risks, corroborated by light EU and bond positioning. On corporate investment, a record number of investors (net 74%) think companies are currently under-investing.

Allocation to US equities hit a two-year high with a net 15% fund managers now overweight from net 4% overweight in November.

Given the backdrop, the Dow Jones is within striking distance of 20,000 levels and has surged nearly 9% since the outcome of the US Presidential election.

"Fund managers have pushed pause on a risk rally, with cash balances falling sharply over the past two months. "With expectations of growth, inflation and corporate profits at multi-year highs, Wall Street is sending a strong signal that it is bullish," said Michael Hartnett, chief investment strategist at BofA-ML.

Allocation to Japanese equities, too, has risen to a 10-month high, from net 5% of the fund managers surveyed underweight in November to net 21% overweight in December. This, the findings suggest, is the biggest month-over-month jump in fund manager survey history.

On the other hand, investors are underweight euro-zone equities for the first time in five months, with a net 1% of fund managers underweight in December from net 4% overweight last month.

"Despite the improved outlook on European economic growth and inflation, global investors continue to shun European stocks amid concerns of further EU disintegration or bank defaults," says Manish Kabra, European equity quantitative strategist at BofA-ML.