Big global investors are not as bearish as they were a month ago.
An increased percentage are no longer as worried about deflation, while some are starting to fret about inflation (which seems very odd given there are no inflationary pressures in the US or most European or Japanese economies, and haven’t been for months).
But these are minor fears. A majority of fund managers surveyed by Bank of America/ Merrill Lynch see no change in the current poor health of the US economy for the next year at least, given that they don’t see a rate rise until at least the third quarter of 2011.
That means they see little change in the low levels of demand, and high unemployment.
And that view was reinforced overnight with more gloomy figures on manufacturing and unemployment which knocked markets lower.
But big investors are now more confident about China and Europe, and less confident about holding American shares, perhaps fearing that the solid earnings we have seen for the past year are going to weaken.
The latest Bank of America Merrill Lynch survey of global investors says the gloomy sentiment among investors about the outlook for the world economy and corporate earnings has eased.
The survey shows a net 5% of respondents predicting that the global economy will improve in the next year.
This is a small turnaround from July when a net 12% of respondents predicted the world economy would deteriorate.
While the percentage of respondents expecting below-trend growth and inflation remained unchanged at 73% in August, the survey shows recession fears easing.
A net 78% of respondents now think a double-dip recession is unlikely.
And after worrying about deflation last month, investors have shifted their focus back towards inflation.
On inflation, the survey shows an almost neutral view on the prospects for a rise in global inflation in the next year.
Just 1% of respondents expect inflation to be lower in 12 months’ time, compared to a net 12% last month.
And a net 14% of asset allocators indicated that global monetary policy is too stimulative, compared to just 5% in July.
Despite this, a majority, some 55% of respondents to the global survey do not see a rate hike in the US before the third quarter of next year, around a year’s time.
"The spotlight of investor pessimism has shifted away from China and Europe to Japan and the US," according to Michael Hartnett chief Global Equities strategist at BofA Merrill Lynch Global Research.
"Investors clearly remain cautious, so better news on U.S. growth and fiscal policy would be a pleasant surprise."
And Gary Baker head of European Equities strategy at BofA Merrill Lynch Global Research said in commentary on the survey, "Investor sentiment on Europe has staged a remarkable recovery in the past few months, underpinned by greater optimism about Europe’s banks. Economic data now has to continue to support this shift."
With an easing in the bearishness, the survey found that asset allocators have cut their cash holdings.
Only 7% were overweight cash in August, compared to 13% in July and 19% in June.
While there was a small rise in allocation to equities, there was a drop in allocation to bonds.
The survey found that a net 23% were underweight bonds in August, compared to a net 15% underweight in July.
On equities, the survey also shows a sharp drop in investors’ appetite for US and Japanese shares, but a recovery in demand for Eurozone equities.
A net 14% of asset allocators are underweight US shares, against 7% overweight in July.
Global asset allocators have also reduced their exposure to Japanese equities.
A net 27% were underweight Japanese equities in August, compared to a net 7% in June.
In contrast, a net 11% were overweight eurozone equities in August, the most positive reading since October 2009.
This compares to a net 10% who were underweight a month earlier.
There was also good news for UK equities on which investors are the most optimistic they have been since May 2007.
The China bears have started disappearing with a net 19% of respondents expecting the Chinese economy to weaken over the next year, compared to 39% just a month ago.
"This improved sentiment was supported by a shift towards commodities. A net 9% of respondents were overweight commodities in August, compared to a net 1% underweight in July," the survey said.
Banks are starting to come back into favour.
The sector finally saw a sharp improvement from a net 28% underweight in July to a net 19% underweight this month.
"This ranked alongside industrials as the biggest sector shift by investors. On the other hand, utilities and pharmaceuticals suffered steep declines in support," the report said.
On currencies, the survey found that asset allocators think the greenback looks undervalued, while the Japanese yen is seen as overvalued.
A net 23% of respondents regard the dollar as undervalued, compared to just 3% in July.
A net 62% see the yen as overvalued – "a survey record" – versus 55% a month earlier.
For this survey, a total of 187 fund managers, managing a total of US$513 billion, participated in the global survey from 6 August to 12 August. A total of 157 managers, managing US$327 billion participated in the regional surveys.
