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Investors regaining risk appetite, says BofAML survey

Global investors have regained appetite for risk against the backdrop of strong liquidity and a fairly positive economic outlook, according to the BofA Merrill Lynch Fund Manager Survey for June.

A net 66 per cent of respondents expect the global economy to strengthen over the next year. This bullish reading is unchanged from last month’s survey.
However, concern at the pace of expansion is rising. A net 78 per cent now anticipate below-trend growth over the next 12 months. In response, more investors than ever before (63 per cent) are calling on companies to increase their capital spending.
Equities are in greater favour than at any time since the start of the year. A net 48 per cent of asset allocators report overweights, up 11 percentage points month-on-month, even though a net 15 per cent now regard the asset class as over-valued – this measure’s strongest response since 2000. Appetite for real estate has also risen. The net six per cent overweight reported ranks as the highest in eight years.
In contrast, underweight positions in bonds (now regarded as over-valued by a net 75 per cent) have reached their highest level since the end of 2013.
The prospect of debt defaults in China has strengthened as the most significant risk on investors’ horizon. It is now cited by 36 per cent of respondents. Some 20 per cent worry most over potential ‘asset mania’ – a new category introduced in the survey this month.
Even so, investors have reduced their cash buffers. Although still somewhat high, average holdings of 4.5 per cent are at their lowest since January.
“Although fund inflows and oil prices argue for near-term consolidation, the case for a summer ‘melt-up’ remains stronger than for a meltdown as high liquidity and low growth force investor cash levels down,” says Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
“Europe has been a cheap way to get equity exposure, but investors no longer see Europe as cheap. This together with some uncertainty on the level of growth may be why optimism is starting to wane,” says Obe Ejikeme, European equity and quantitative strategist.
Investors no longer see quantitative easing by the European Central Bank as imminent. Forty two per cent of respondents anticipate any ECB program coming in Q4 or even 2015, up from 19 per cent last month. A further 22 per cent expect no action. Against this background, longer-term conviction towards European equities has started to decline. A net 21 per cent now see Europe as the equity market they are most likely to overweight over the next year, down seven percentage points month-on-month.
However, current allocations suggest global investors are not yet ready to give up on the region. Net overweights have risen for the second consecutive month, to a net 43 per cent.
Elsewhere, regional fund managers are already showing signs of caution. A net six per cent of now regard European equities as over-valued – the highest proportion since 2000. As recently as April a net 16 per cent viewed the market as under-valued.
Japanese equities have declined seven per cent this year, underperforming other global markets. The survey shows global investors treating this as a buying opportunity. A net 21 per cent are now overweight, up from a net seven per cent in May.
Moreover, a net 10 per cent favour overweighting Japan in preference to all other equity markets in the next year.
These changes come as regional fund managers turn significantly more positive on Japan’s outlook than recently. A net 73 per cent expect the country’s economy to strengthen over the next 12 months. This represents a 20 percentage point rise in the space of two months.
Bullishness on the US dollar has re-emerged strongly. A net 79 per cent of respondents now expect the currency to appreciate over the next year. This stands out as one of the strongest readings on this measure in the past 15 years.
In contrast, a net 28 and 48 per cent expect the Euro and Japanese yen, respectively, to weaken over the same period. The European currency’s reading has declined seven percentage points month-on-month. This appears to reflect a combination of the ECB’s dovish stance and some weaker European macro data.

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