Emerging Markets Pessimism Unwinding
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 percent,
unchanged from March and higher than the 56 percent in February.
That view supports expectations for profits – a net 44 percent of
investors believe profits will improve over the next 12 months, up
from 40 percent in March and the same as in February.
However, expectations of higher short-term rates are growing
with a net 66 percent believing short rates will rise over the next
12 months, up from 55 percent 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 percent believes they’ll be higher in 12 months, down
slightly from 74 percent in March and 73 percent in February. Taken
together, expectations for a steeper yield curve are falling away.
A net 22 percent of investors are expecting a steepening compared
with 39 percent in March and 42 percent in February.
There was a big change in sentiment among investors when
choosing between value and growth stocks. In April, a net 40
percent 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. “Recent market
volatility has led investors to ‘taper’ their extreme bullishness
on U.S. growth-plays and extreme bearishness on emerging markets,”
said Michael Hartnett, chief investment strategist at BofA Merrill
Lynch Global Research.
Seeking alternative markets
Regionally, a net 66 percent 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 percent think these are undervalued, up from 49
percent in March and the highest reading ever. In addition, only a
net 2 percent would like to underweight emerging markets, down
sharply from 21 percent 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 percent, a notable jump on the 13 percent in
March. Also, long peripheral debt was cited as a crowded trade by
19 percent of respondents, up from 16 percent in March.
“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,” said Obe Ejikeme, European Equity and Quantitative
strategist.
Abenomics effect wanes
In Japan, the boost provided by the launch of “Abenomics” over a
year ago continues to wane. Only a net 13 percent of investors are
still overweight Japanese equities, down from 16 percent in March
and 30 percent in February. Similarly, a net 16 percent have a
favorable outlook for Japanese profits, down from 18 percent in
March and 28 percent in February while perceptions of their quality
and volatility turn for the worse.
Fund Manager SurveyAn overall total of 239 panelists with US$674
billion of assets under management participated in the survey from
4 April to 10 April 2014. A total of 188 managers, managing US$546
billion, participated in the global survey. A total of 120
managers, managing US$265 billion, participated in the regional
surveys. The survey was conducted by BofA Merrill Lynch Global
Research with the help of market research company TNS. Through its
international network in more than 50 countries, TNS provides
market information services in over 80 countries to national and
multi-national organizations. It is ranked as the fourth-largest
market information group in the world.
BofA Merrill Lynch Global ResearchThe BofA Merrill Lynch Global
Research franchise covers more than 3,500 stocks and 1,180 credits
globally and ranks in the top tier in many external surveys. Most
recently, the group was named Top Global Research Firm of 2013 by
Institutional Investor magazine; No. 1 in the 2014 Institutional
Investor All-Europe survey; No. 1 in the 2013 Institutional
Investor All-Asia survey for the third consecutive year; No. 1 in
the Institutional Investor 2013 Emerging Market & Fixed Income
Survey; No. 2 in the 2013 Institutional Investor All-America
survey; No. 2 in the 2013 All-Latin America survey; and No. 2 in
the 2013 All-China survey. The group was also named No. 2 in the
2014 Institutional Investor All-Europe Fixed Income Research
survey; and No. 2 in the 2013 All-America Fixed Income survey for
the second consecutive year.
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