Investors start 2014 more optimistic about global growth prospects, especially for the U.S. but increasingly for Europe as well, according to the BofA Merrill Lynch Fund Manager Survey for January.
The proportion of investors who believe the global economy will strengthen this year has risen to a net 75% from a net 71% in December, continuing a trend of rising optimism that started in late 2012.
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This optimism is reflected in rising expectations for corporate profits with a net 48% looking for an improvement, up from a net 41% in December.
Among the regions, a net 29% of investors choose both the US and Japan with the most favorable prospects for profits. Europe has improved to a net 8% expecting profit improvement from a net 4% expecting deterioration in the December survey.
As investors’ growth convictions rise, investors’ preference for Global Equities remains strong. A net 55% say they’re overweight equities, continuing a trend which started in mid-2012 when a net 4% were underweight equities.
Confidence in equities is maintained despite a net 7% of respondents believing equity markets are overvalued, the highest reading since 2000. The overvaluation view is driven predominantly by the views on US equities where a net 72% say stocks are overvalued.
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By GlobalDataGlobal growth expectations also raised risk taking capacity. A net 4 percent of investors say they are undertaking a higher than normal level of risk in their portfolios, a near-record high. This rise in risk appetite is reflected in sector allocation where a net 42% of respondents are overweight in tech stocks, but a net 32% are underweight staples, the lowest in a decade.
Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, said: "Until corporations reduce high cash levels, investors will run high cash levels and equity corrections will be extremely limited."
John Bilton, European investment strategist, BofA Merrill Lynch, said: "Managers are positioned for a strong profit recovery in Europe, and the upcoming earnings season is key to maintaining this stance; given the high sentiment, any earnings disappointment will likely be punished by investors."
Demand for capex reach to record highs
Investors increasingly believe companies should be using their rising profits to grow their businesses – a net 67% believe companies are under-investing, a record high reading in the history of the survey. And when asked what companies should do with excess cash, 58% favored capex, while only 11% want cash preservation.
Global Emerging Markets remain a drag but stars align for Europe
Against the broader global background of rising optimism from growth and profits, Global Emerging Markets remain out of favor. A net 61% expect a sharp deterioration in profits in GEM equities, up from net 32% expecting the same in December.
Furthermore, investors believe the biggest "tail risk" to the global outlook is a China hard landing and commodity collapse – some 37% of investors take this view, compared with the 14% given to each of the EU sovereign/banking crisis and a geopolitical crisis.
As for Europe, a net 22% believe equities in the region are under-valued up from net 15% expecting the same last month. On a 12-month view, when asked which equities they would most like to overweight, investors picked Europe with a net 34%, the second-highest reading in the history of the survey.
Likewise, for the same timeframe, only Japan scored a positive with a net 12% would like to overweight, while a net 13% and a net 28% expect to underweight US and GEM equities respectively.
Risk-taking near historic high
Risk-taking by investors is near historic highs. A net 4% of investors say they are taking higher-than-normal risks. That’s up from a net zero percent in December and a net -4 in November. Since the start of this survey this figure has been solidly positive on only three previous occasions.
This appetite for risk is also reflected in investors’ preferred sectors – Tech, Industrials and Banks top their overweight lists while Utilities, Staples and Telecoms languish in underweight territory.
