The global rebound may have peaked earlier this month, but that hasn’t stopped the rush of confidence.
The monthly Merrill Lynch/Bank of America survey of global fund managers says that "Bullishness in global markets has reached new heights with seven out of 10 investors who predict the world economy will improve in the next 12 months.
The survey results, released last week, positive expectations on corporate profits has become a major driver, despite evidence that the global economy remains in recession, as do major economies in Europe, Asia (not China) and the US.
There’s no sign of fears about the huge debt issues major governments are making, and will have to make for years to come, or fears of the possible upturn in inflation that might follow.
Cash is down, shares are popular and confidence is up. Fears about risk have eased.
But it seems some managers are charging headlong into emerging markets (and are they back in oil and other commodities as well?) where a bit of circumspection might be in order.
"Portfolio managers are backing their optimism with action by putting their money to work.
"Average cash holdings have fallen to 4.3 percent from 4.9 percent in April.
"Equities, while underweight, are more popular, especially cyclical sectors that are expected to perform best in a recovery. Investors have moved to a net underweight position in bonds for the first time since last August.
"Many are rushing to emerging markets, as investor optimism on China’s economy is higher than at any point in the past six years.
“Investors are finally opening their wallets and reducing cash balances to mid-cycle levels to buy equities, cyclical stocks and risky assets,” according to Michael Hartnett, Bank of America Securities-Merrill Lynch co-head of international investment strategy.
He said in a comment on the May survey: “However, this rush to take on risk, especially in emerging markets, is reminiscent of bubble-like behavior. A record net 40 percent of fund managers are looking to overweight the region in the next 12 months.”
And, according to Gary Baker, Bank of America Securities-Merrill Lynch co-head of international investment strategy: “Having addressed their most urgent priority by returning to financial stocks, this month investors have added exposure to cyclical, real economy stocks and further purged defensive overweight positions.”
The survey shows that sentiment towards the global economy has completed a sharp turnaround from the dark days of October last year when a net 60 percent of investors forecasted a worsening outlook.
In the May survey, a net 57 percent say the economy will improve over the next 12 months, up from 26 percent in April.
"Nowhere has the reversal in economic outlook been more pronounced than in Europe.
"A net 35 percent of respondents to the Regional Fund Manager Survey expect Europe’s economy to improve in the coming year.
"That’s in sharp contrast to April when a net 26 percent forecasted further deterioration< " the survey shows..
"Investors have suddenly become bullish about corporate profits with a net 18 percent who say the outlook for global profits will improve in the next 12 months.
"This represents a big swing from April when a net 12 percent were bearish about profits.
"The heightened appetite for equities is concentrated on emerging markets.
"A net 46 percent of investors are overweight emerging market stocks, up from a net 26 percent in April.
"Bullishness about China’s economy has reached its highest level since the survey began tracking China in 2003.
"A net 61 percent of respondents see its economy improving — in November, a net 87 percent of the panel expected the Chinese economy to weaken.
"A shift out of defensive investments toward cyclical stocks is ongoing.
"For the first time since early 2005, panelists are underweight (net 2 percent) their favorite recessionary sector, pharmaceuticals, compared with a net 21 percent overweight in April.
"Investors have also reduced holdings in Staples, Telecoms and Utilities in favor of Energy, Materials and Industrials.
"They have continued to increase allocations to Banks, reducing the net underweight position to the sector’s lowest since June 2007.
"However, on a less sanguine note, asset allocators have yet to fully embrace equities.
"A net 6 percent of asset allocators remain under weight equities globally, with significant underweights in Japan, the eurozone and the U.K.
“The recharged optimism of fund managers is not fully matched by asset allocators. One upside risk for markets is more asset allocation out of cash and bonds into equities,” said Hartnett.
Merrill Lynch said a total of 220 fund managers, managing a total of U.S. $US617 billion, participated in the global survey from May 8 to May 14.
A total of 182 managers, managing U.S. $355 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.
This renewed bullishness is supported by figures on fund movements quoted by Reuters from consultants, EPFR Global.
It said last week that investors pulled $US21 billion out of safe-haven money market funds in favour of higher-risk assets in the third week of this month, while the re-election of the Congress-led Government in India helped boost support for emerging
