There was a clear sense of ‘flight’ by some of the world’s biggest investors in the November Bank of America Merrill Lynch survey of global fund managers.
And looking at the performance of markets overnight, it’s easy to understand why.
European sharemarkets down 1% or more, gold down more than $US50 an ounce, oil back under $US100 a barrel, US markets up, and a sudden slide, despite reasonable economic data.
The Australian dollar fell under parity with the US dollar for the first time in around six weeks as everyone eyed another day of high interest rates for Italy and Spain and worries about the European Central Bank.
The survey results not only suggest global and regional fund managers are very worried about Europe, but are concerned about the US debt position, and see ‘safe havens’ in emerging markets, especially China.
So, as a result of these concerns fund managers are still cashed up (though not as much as in October), moving their assets into emerging market and US equities and away from Europe as 72% expect a eurozone recession in the next year.
Investment in US equities more than tripled in November. That’s despite most fund managers expecting US debt to be downgraded in the next two years.
But the November Bank of America Merrill Lynch survey of fund managers showed the same investors remain underweight equities as a whole.
The proportion of investors who are overweight in US stocks in their portfolio more than tripled to a net 20% in November, up from a net 6% in the October survey.
While those favouring global emerging market equities totalled a net 27% in November, three times October’s level.
A net 5% of the panel surveyed globally remained underweight in equities as an asset class, though that number represented an improvement from October’s 7%.
"Investors are showing belief in emerging market growth and U.S. resilience, which is key to retaining positive global sentiment," said Michael Hartnett, chief global equities strategist at BofA Merrill Lynch Research, in a statement.
And despite the negative outlook on the eurozone economy, investors only reduced their October position in the region’s equities by 1% to 30%, so they do not expect the slowdown to be difficult, at this stage at least.
Interest in commodities also picked up with renewed confidence in energy and materials investment at the start of November, driven by the rising level of positive sentiment towards emerging markets and China in particular.
But investors also feel more confident that a possible recession will be confined to the eurozone with nearly a third (31%) of fund managers surveyed saying the world economy will avoid a recession, up from 25% in October.
That has helped fund managers sharply lift their exposure to emerging markets with 27% now overweight, up from 9% in October, a noticeable change.
The more favourable view of emerging markets represents an “increased faith in the resilience of China’s economy", according to BofA Merrill Lynch.
More than three-quarters of the panel expect a soft landing in China, with the Asian economic powerhouse seen as expanding in excess of 7% next year (just over 9% this year and 8.5% according to forecasts from groups like the IMF).
The proportion of fund managers expecting China’s economy to weaken next year also fell to a net 25% in the November survey from 47% in October.
The latest Bank of America Merrill Lynch survey was conducted last week, from November 4 to the 10th.
The survey covered 258 panellists with $US665 billion of assets under management in all, while the global survey panel consisted of 188 managers in charge of $US514 billion in assets.
That was during a pretty stressful time, although by November 10 it was clear there would be changes in the governments of Greece and Italy.
But the pressures in eurozone bond markets have intensified since then, adding to the continuing sense of foreboding.
Gary Baker, head of European equities strategy at Bank of America Merrill Lynch Research, said, "European growth concerns are more intense but sentiment looks to be close to rock bottom – unless Europe’s problems spread to the rest of the world".
And that’s the big ‘if’.
Spain’s national elections won’t be a game breaker on Sunday, but they will ensure that country continues to tackle its deficit and debt problems (which are smaller than those confronting Greece, Italy and other struggling states).
Despite the improved outlook for the US economy (fund managers would have seen the better than forecast first estimate of third quarter growth and other more upbeat news), fund managers now seem unusually bearish about America’s credit rating.
Fifty-three percent said they think there will be a downgrade by 2013 (that is after the 2012 elections); while 36% said they expect the downgrade to happen as early as next year.
Moody’s has already said it will wait until early 2013 to see what happens in the polls and the results of the current attempts to cut spending, which won’t start until then.
Even if there is no agreement, the cuts are supposed to start in 2013 in an automatic fashion, but some Congressional leaders say the cuts can easily be stopped by the new Congress.
Three months ago Standard & Poor’s surprised markets with a one-notch downgrade of America’s AAA credit ratin
