It only took less than a month, but the almost unchecked bullishness we saw in the February Bank of America/Merrill Lynch survey of global and regional fund managers, has gone and been replaced by a more cautious tone.
In fact thanks to the recent oil price spike, and some growing concerns about market stability, big global investors have rediscovered previously held concerns about corporate profitability and global growth.
The survey was carried out before the Japanese quake, tsunami and nuclear crisis, which have triggered an almighty sell off and no doubt even greater caution among big investors that should be apparent from the April survey.
The survey of 203 fund managers, managing a total of $US602 billion, was carried out between March 4 to March 10, a day before the events in Japan started with the quake and tsunami.
But before then, the enormous confidence we saw in February, were dissipating, with the March survey results showing that fund managers were turning away from equity investments and had started loading up on cash.
The survey found that almost a quarter of investors said they expected corporate earnings to fall over the next 12 months.
The bank said this was the sharpest turnaround in sentiment on a month-to-month basis since 2004, when it first began asking the question.
While almost a net third of managers still believed companies would be able to grow earnings in the next year, this was also down from over a net half a month ago. A net 31% viewed consensus earnings estimates to be too high.
There was a 12 percentage point drop in the number of respondents that were holding more equities than their benchmark (or overweight).
A net 8% of fund managers reported that they were taking a lower level of risk than normal, up from last month
Investors are also increasingly hoarding cash – a move traditionally used when they believe equities will fall.
A net 18% of respondents held cash positions that were overweight in relation to their benchmark, compared to a net 3% who were underweight cash in February.
In the statement with the survey Michael Hartnett, the chief global equity strategist at BofA Merrill Lynch Global Research, said: "The shift in the March survey is toward stagflation, with lower growth expectations and higher inflation and interest rate expectations causing cash levels to rise."
This sudden emergence of a slide in confidence was also reflected in the survey participants’ macroeconomic outlook.
A net 31% of fund managers still believe the global economy will strengthen in the next year, but this is down from a net 51% in February.
In the US the fall was even sharper, from a net 52% to a net 21%, while respondents in Asia outside Japan turned negative. A net 25% sees the region’s economy weakening over the period.
But the survey did show that this recent erosion of confidence in emerging markets starting to turn.
A net 15% of regional fund managers now expect the Chinese economy to weaken in the next year, down from a net 27% in February.
Globally, the identification of the Chinese real estate market as a major tail risk has also declined.
Overall, investors are now neutral on emerging markets equities. Two months earlier, a net 43% was overweight.
But while fears of recession remain remote, fears about stagflation have risen.
In the space of two months, the proportion of fund managers anticipating below-trend growth and above-trend inflation has doubled to 38%.
Among four possible outlooks, this is now the most common among respondents.
Investors do not expect American interest rates to rise any sooner as a result of the oil price shock.
Three-quarters of them still see a rate hike within 12 months, but a net 35% expects the yield curve to flatten over the neat year, up from a net 14% in February.
No less than 72 percent now thinks the ECB will raise rates before July. No respondents held this view last month.
(That follows the comments made by ECB head Jean-Claude Trichet who used a form of words after the March board meeting to signal a rate rise is coming. The February inflation reading for the eurozone of 2.4%, which is above 2% target, has added to the feeling that the central bank will lift rate sin either April or May).
"If the oil price reverses, this change in sentiment could prove quite fleeting. There has been no massive sell-off. Investors are in ‘wait-and-see’ mode,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
But to repeat, this survey was completed a day before the events in Japan on March 11 and since then, including the big sell off and dramatic surge in the value of the yen.
But it is interesting that even before that, the upsurge in Middle Eastern violence in Libya and its impact on oil prices had forced a change and turnaround from the absurdly high levels of bullishness we saw in February.
