Global investors are significantly more positive on the outlook for Europe after the European Central Bank’s announcement of quantitative easing to reflate the region’s economy, according to the BofA Merrill Lynch Fund Manager Survey for February.
Europe’s profit outlook is at its best since 2009, according to panel members. A net 81% of regional specialists see the economy strengthening in the next year.
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Against this background, a record net 51% make the region their top pick in equities over a one-year horizon, up from January’s net 18%. A net 55% are already overweight.
The U.S. has been the main loser from this rotation. Overweights on U.S. equities have declined to a net 6%, down 18 points versus last month.
Overall, fund managers have increased their allocations both to stocks (a net 57% overweight, up six points month-on-month) and cash (a net 22% overweight, a five-point rise).
This is at the expense of bonds, which are now seen as overvalued by a net 79 percent. Bonds are also perceived as the asset class most vulnerable to increased volatility this year.
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By GlobalDataDespite exuberance over Europe, the global growth outlook is little changed. This reflects declining expectations on China.
A net 58% of respondents now expect that country’s economy to weaken over the next 12 months, the survey’s lowest reading on this measure in nearly two years.
BofA Merrill Lynch Research chief investment strategist Michael Hartnett said, "The ECB has successfully vanquished global deflation fears and induced the return of reflation trades in February."
Sentiment has gotten ahead of the fundamentals on European equities. It is as if there is not a single bear left. We will need to see a strong recovery very soon to keep the bulls happy," said European equity and quantitative strategist Manish Kabra.
Investors’ new bullishness on Europe is strongly focused on the Eurozone. Non-Euro markets are out of favor.
Last month, France and Italy stood out as their worst picks, but a net 42% percent of regional fund managers now intend to underweight the U.K. and Switzerland this year. They have also shifted to a negative stance on Sweden.
Autos are now European regional investors’ favored sector. A net 26% are overweight, a month-on-month gain of 12 percentage points.
The travel and leisure area has also gained support with a 10-point rise.
In contrast, banks and insurers saw notable declines in sentiment. Month-on-month falls of 32 and 20 percentage points, respectively, have taken both into underweight territory. Utilities are now the region’s least favored sector.
Anxiety over potential Eurozone deflation has declined with the ECB’s QE announcement. Indeed, inflation expectations are picking up.
A net 29% of fund managers expect global core CPI to be higher in a year’s time, up from a net 14% a month ago.
A potential geopolitical crisis is now clearly respondents’ major tail risk. One in three identifies it as their major concern.
China’s weakening outlook is weighing on Global Emerging Markets equities, but net underweights on GEMs have declined by 12 percentage points since January to a net 1%.
Sentiment towards gold is also improving. Forty percent of survey participants expect the price to be higher in 12 months’ time. Last month, bears on the precious metal still outnumbered bulls.
Only a net 3% now considers gold overvalued, compared to a net 20% as recently as December.
Many investors continue to see value in oil. A net 39% regard crude as undervalued, down slightly from January’s reading.
