Investor confidence in global economic growth remains high even as expectations of higher short-term rates increase, according to the BofA Merrill Lynch Fund Manager Survey for April.
The survey, taken between April 4 and April 10, 2014 showed that the number of investors believing the global economy will grow over the next 12 months was steady at a bullish net 62%, unchanged from March and higher than the 56% in February. That view supports expectations for profits – a net 44% of investors believe profits will improve over the next 12 months, up from 40% in March and the same as in February.
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However, expectations of higher short-term rates are growing with a net 66% believing short rates will rise over the next 12 months, up from 55% in both March and February and the highest in three years. This expectation of normalizing monetary policies, though, hasn’t changed sentiment on long-term rates much – a net 72% believes they’ll be higher in 12 months, down slightly from 74% in March and 73 percent in February. Taken together, expectations for a steeper yield curve are falling away.
A net 22% of investors are expecting a steepening compared with 39% in March and 42% in February.
There was a big change in sentiment among investors when choosing between value and growth stocks. In April, a net 40% believed value stocks will outperform growth stocks over the next 12 months, more than triple the level in March and an all-time high.
The preference for value might offer one clue to the recent sell-off in technology and biotech stocks.
Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, said: "Recent market volatility has led investors to ‘taper’ their extreme bullishness on U.S. growth-plays and extreme bearishness on emerging markets."
Seeking alternative markets
Regionally, a net 66% of global fund managers believe the U.S. is still the most over-valued equity market, little changed from March and February. That has many looking again at emerging markets – a net 55% think these are undervalued, up from 49% in March and the highest reading ever.
In addition, only a net 2% would like to underweight emerging markets, down sharply from 21% in March.
Crowded trades
Fund managers are taking a more guarded view of assets favored in recent years. Topping the list of crowded trades are Long U.S. High-Yield bonds at 22%, a notable jump on the 13% in March. Also, long peripheral debt was cited as a crowded trade by 19% of respondents, up from 16% in March.
Obe Ejikeme, European Equity and Quantitative strategist, BofA, said: "After two years of cyclical outperformance in Europe, some of the exuberance we see in investor sentiment and positioning suggests a rotation into more defensive stocks and sectors may be imminent."
Abenomics effect wanes
In Japan, the boost provided by the launch of "Abenomics" over a year ago continues to wane. Only a net 13% of investors are still overweight Japanese equities, down from 16% in March and 30% in February. Similarly, a net 16% have a favorable outlook for Japanese profits, down from 18% in March and 28% in February while perceptions of their quality and volatility turn for the worse.
