Global investors have a restored appetite for risk amid greater optimism over the outlook for profits and the economy, according to the BofA Merrill Lynch Fund Manager Survey for November. A net 47 percent of the global panel expects the economy to strengthen in the year ahead, a rise from a net 33 percent in October. Investors have expressed similar positivity over profits – a net 42 percent say that global corporate profits will improve in the coming year, up from a net 27 percent last month.
Investors have signaled that their optimism has been translating into action over recent weeks. In October, a net 16 percent of the panel said they were taking lower than normal levels of risk. This month, a net 2 percent are taking above-normal risk. The proportion taking out protection against a sharp fall in equities in the coming three months has fallen to a net -39 percent from a net -35 percent.
Asset allocators have shifted out of cash and increased their allocations to equities. A net 13 percent of respondents to the global survey are overweight cash in November, down from a net 27 percent in October. The proportion of asset allocators overweight equities has risen by 12 percentage points to a net 46 percent. Hedge funds have also increased their net allocations to equities – 43 percent of surveyed hedge funds are net long equities, up from 35 percent one month ago. Japan is the region most in favor, while investors are sending mixed signals about appetite towards Europe. Real Estate allocations have reached the highest overweight recorded since its inclusion in the survey in 2006.
“Deflation might be in the back of investors’ minds, but taking on risk, especially in equities, in Japan and in the dollar is at the forefront of their thinking,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research. “European stocks were recently boosted bythe best earnings season in three years. However concerns over longevity of growth and deflation continue. Three wise themes of yield, quality, and large cap are the best places to hide in European stocks,” said Manish Kabra, European equity and quantitative strategist.
Japan – most positive outlook since 2005
Japanese equities have seen a second big pick up in allocations in consecutive months, and the trend is likely to continue. A net 45 percent of global asset allocators are overweight Japan, a rise from a net 32 percent in October and a net 23 percent in September. Japan is also the most favored region for the coming year. A net 27 percent of the investor panel says that Japan is the region they are most likely to overweight in the next 12 months. This represents a nine-year high and a rise from a net 14 percent in October.
Conviction over Japan appears to be underpinned by a belief in the profit outlook and a view that the country’s stocks are undervalued. A net 26 percent of respondents identified Japan as having the most favorable profit outlook for the year ahead – a rise of 10 percentage points month-on-month. And a net 17 percent say that Japanese equities are the most undervalued in the world.
As they assess Japan’s outlook, investors are weighing up the prospect of the yen suffering more depreciation in the coming year than the euro or dollar. A net 57 percent of the global panel expects the yen to fall in value on a trade-weighted basis. This, however, could make Japanese exporters attractive. The regional survey highlights how three of Japan’s largest exporting sectors – technology, industrials and autos – are the most favored by local investors.
Risk appetite overcomes fear of tail-risks
Investors have marked out deflation as the biggest risk to the market’s upward trajectory. Twenty-nine percent of the global panel said that eurozone deflation is the biggest “tail risk,” ahead of geopolitical crisis (21 percent). Furthermore, asked in a new question what is the greatest risk in 2015, 71 percent opted for deflation over inflation.
But while deflation is a concern, they don’t appear to see it as the most likely outcome. A net 35 percent of investors have said that they expect global core inflation to pick up over the year ahead.
Confused signals over European equities and concern over France
Investors appear unsure how to treat European equities. Global asset allocators increased their moderate overweight positions slightly this month – a net 8 percent are now overweight the region. But investors have also indicated that they would like to underweight the region in the coming 12 months. Meanwhile, investors inside Europe have indicated optimism over the region’s prospects for improving growth and profits – a net 62 percent of the regional respondents forecast improving earnings per share for the coming year, up from a net 32 percent in October. But, they have increased cash holdings in the past month and have indicated a growing appetite to underweight France and scale back holdings in Italy.