It’s amazing what a short sharp slump in commodity prices will do to sentiment.
Take big fund global managers who have become less concerned about commodity price inflation with the slump two weeks ago in commodity prices, and instead see the European sovereign debt crisis as a new bogey, according to the latest Bank of America Merrill Lynch survey of fund managers.
They are also gloomier about the economic outlook for China and Europe, but not all emerging markets.
Managers are also regaining their faith in Japan, accepting that there is going to be a big short term hit to the economy (as we saw yesterday, see next story).
Bank of America/Merrill Lynch’s latest fund manager survey, conducted from May 6 to 12, shows the threat of a Greek debt restructuring is now front and centre in terms of concerns.
There’s also rising concerns over a premature fiscal tightening in the US, which is tied to the current great uncertainty of what happens when the US Federal Reserve finishes its QE 2 program next month.
And confidence in the outlook for global growth and corporate profits has dipped.
The proportion of the panel believing that the world economy will strengthen in the next 12 months has fallen to a net 10%, down from a net 27% last month and that bullish net 58% in February when it seemed as though the bulls had been let into the china shop, unsupervised.
Similarly, only a net 9% of respondents in the survey now look for corporate profits to improve in the coming year.
Conviction in the outlook is weakest about the outlook for Europe.
Expectations turned negative in May with a net 8% expecting the region’s economy to weaken in the next year.
Just two months ago, a net 32% forecast that it would strengthen. (Although the first quarter growth figures were solid to strong for countries like Germany and France.)
There’s a simple reason for this: the ongoing eurozone sovereign debt crisis as the largest tail risk globally (up to 36% from 21% in April).
With prospects for growth more challenging and inflation fears receding, asset allocators have postponed their expectations of a rise in US pushing it out into next year.
In the April survey, 69% of participants saw the Federal Reserve first hiking rates by the end of this year; now 73% sees this occurring in 2012.
That’s a huge turnaround and has been supported by generally weak to modest data, such as a slowing in industrial production and another fall in new home starts and permits.
(The Fed’s minutes for its last meeting, out this week, confirm this view.)
But against this accommodating background, risk appetite has fallen only modestly.
The survey says fund managers trimmed exposure to equities and commodities, while adding to cash and bond holdings slightly.
It says risk aversion is more evident in strong sector rotation into more defensive areas, such as consumer staples and pharmaceuticals, and out of more volatile and growth-dependent sectors, such as energy and materials.
"A triple dip in growth expectations is reshaping investors’ stance on risk," said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research.
"A risk for investors is that pessimism on Europe now looks to be overdone, particularly in light of strong recent GDP data," said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
China has gone off the radar for some investors and the bears are rising in number.
The survey says a net 28% of regional fund managers expect China’s economy to weaken in the coming year, up from a net 15% in March.
But not all emerging markets are on the nose to big investors.
The survey clearly shows that despite lower confidence in other important BRIC economies, such as Brazil, allocations to emerging market (EM) equities continue to rise.
A net 29% of the panel now has an overweight position in EM equities.
"This represents the highest reading in any region this month and compares with a net zero percent two months earlier," the survey said.
This positive stance partly reflects the earnings outlook in emerging markets.
A net 19% of respondents believe that EM corporates are most favourably positioned to grow profits (second only to the US).
It also reflects growing optimism on domestic demand in emerging markets.
A net 42% sees this as the most important driver for EM equities, up from a net 5% in March.
Looking at Japan and the gloominess about the initial impact of the March 11 disasters are now changing for the better.
The survey shows that investors have scaled back their initially negative views of the events’ impact.
In April’s survey, respondents were divided evenly between those expecting the country’s economy to weaken in the next year and those expecting it to strengthen; this month a net 59% sees it strengthening over the period.
And, a net 38% expects Japanese companies to improve earnings per share in the next 12 months. This compares with a net 33% in April seeing EPS declines.
Sentiment towards Japanese equities began to improve as well, with April’s net underweight (18%) improving by a percentage point in May.
The panel continues to avoid exposure to the yen, however. A net 64% regards the currency as overvalued – little changed from the previous three monthly readings.
But while the yen is on the nose, the big fund managers have stronger views on the world’s
