The upturn in global investor sentiment has withstood the recent large sell-off in bonds, according to the June survey of fund managers by Merrill Lynch.
But some investors are starting to worry that the strong rally in emerging markets (such as China and India) may have run out of puff and be about to reverse.
But investors in the survey have expressed confidence in global economic recovery and, broadly, in the equity markets, in spite of their fears the US bond sell-off would damage sentiment.
That was despite the rise in yields 10-year US Treasury bonds to 3.85% from 3.09% between the May and June surveys.
A net 62% of respondents believe that the world economy will improve in the next 12 months, an increase of 5% points since May.
And, for the first time since December 2007 the majority of asset allocators responding to the survey are overweight equities — a net 9% are overweight the asset class.
Just 7% of the panel believes that the world will go through recession in the coming year, down sharply from 38% in May and 70% in April.
This renewed optimism is despite global markets moving sideways for much of the past month as the bounce that started in early March runs out of puff.
“Investors are currently ruling out the prospect of the much-feared double-dip recession, and have shrugged off the weakness in bonds,” said Michael Hartnett, Bank of America Securities-Merrill Lynch chief global equity strategist, said in the June survey summary.
“While investors are finally overweight equities, risk appetite remains relatively constrained. Investors seem happy to underweight defensives at this point, but overweight conviction is tightly concentrated on just two sectors: energy and technology.”
Investors are rewriting the rules for positioning their portfolios at the start of a new investment cycle.
Rather than focus on moving from defensive to early cyclical stocks, such as consumer discretionary, they are basing their strategy around optimism over Chinese growth and emerging markets performance.
A net 62% of respondents say that China’s economy will improve in the next 12 months — up 1% and a new all-time high following the record reading of 61% in May.
"Recognizing the need to feed China’s appetite, investors are turning to commodities as their asset class of choice. A net 19% of asset allocators are overweight commodities, up from 7% in May.
Reflecting this trend, energy is the sector attracting the biggest positive sectoral swing in allocations this month.
A net 30% of the panel is overweight energy stocks, up from a net 18% in May and 8% in April. (Nothing like that sharp run up in prices to get the herd following an asset class such as oil).
Global emerging markets (GEM) remains by far the most popular destination globally for equity allocations.
A net 37% of the panel picked out this area as their preferred region to overweight, well ahead of the US, the second-favorite location.
However there are small signs that the euphoria surrounding emerging markets might have peaked.
The figure of 37 percent was down on May’s number of 40%. Furthermore, a net 10% of the panel identified GEM as overvalued.
Global optimism has not spread everywhere, however.
European respondents do not see an end to recession with 70% of the regional panel predicting a further downturn in the next 12 months.
Global investors view Europe as their least preferred destination, with a net 23 % picking the eurozone as the region they would most like to underweight.
The number of investors overweight cash has fallen to a net 12% in June from a net 20% in May.
Belief in corporate profitability is growing.
That’s despite more signs that the US second quarter (ending June 30) will be another tough three months for corporate profits, which Thomson Reuters says could be down 34%.
A net 49% of respondents believe that the outlook for corporate profits will improve over the coming year. As recently as April, a net 12% said the outlook would deteriorate.
The return of inflation, a possible cause of the bond market sell-off, is something the panel has recognized.
A net 19% of global investors believe that inflation will be higher in 12 months’ time, compared with only 1% predicting lower inflation a month ago.
A net 20% of the panel believed that monetary policy across the globe is too stimulative. (But nevertheless they are all benefitting from the cheap and plentiful supplies of money).
A total of 226 fund managers, managing a total of $US620 billion, participated in the global survey from June 5 to June 11.
A total of 184 managers, managing $US362 billion, participated in the regional surveys. The survey was conducted by Bank of America Securities-Merrill Lynch Research with the help of market research company TNS
Meanwhile Bloomberg
reported that the US sharemarket bounce may be fading because fewer shares are participating.
Bloomberg said that according to StockCharts.com, a stock charting company, the percentage of companies listed on the New York Stock Exchange trading above their 50-day average price shrank to less than 70 percent this month after topping 90 percent in May.
The divergence shows a narrowing in the breadth of the market’s advance, according to analysts who make predictions based on price patterns and volume history.
