What a difference 30 days can make. After months of record pessimism amongst asset managers, sentiment is now bullish, according to Merrill Lynch’s survey of global fund managers.
Surveying 214 fund managers who cumulatively manage a total of US$561 billion, Merrill Lynch’s report categorizes respondents as “reluctant bulls” who are not yet ready to barrel head-first into equities, but there is a definite belief that the “worst is over.”
“The consensus has shifted from apocalyptically bearish to reluctantly bullish. But it’s important to note that asset allocators are still underweight equities, indicating they have yet to fully embrace the idea of a new bull market,” says Michael Hartnett, co-head of international investment strategy at Banc of America Securities-Merrill Lynch Research.
Fund managers sharply cut their underweight in equities to 17% from 41% over the course of the month. They are slowly but surely moving out of cash and fixed income. Overweight positions in bonds have declined and even hedge funds managers raised their net equity exposure to an 8-month high of 25%.
Profit expectations remain negative overall, but they have improved drastically since hitting bottom in October 2008. Sentiment on earnings remains negative at a net -12%, but that’s far more optimistic than the sentiment trough of -74% in October 2008.
Many managers appear to be deploying the cash overweights they’ve been carrying. Cash positions fell to a net 24% position, their lowest since late-2007. The average cash balance for funds dropped to 4.9% allocation from 5.2%.
Global growth outlook at five year high
April’s survey is the most optimistic reading on global growth since 2004, the firm points out. A net +24% of investors believe the global economy will strengthen over the next 12 months.
This sentiment seems to go hand in hand with a renewed optimism toward the state of the world’s banks. According to the survey, fund managers cut underweight positions in banks to 26% from a record 48% in March. The report argues this was a trigger for a widespread shift out of defensive positions into cyclical sectors.
Technology is the most popular investment sector, with a net 27% of respondents overweight the sector. Tech investments overtook pharmaceuticals as the favorite—a classic bear market refuge—as the preferred assets class. Allocations to pharmaceuticals have seen a drop from 30% to 21%. According to the survey, managers are neutral on materials, compared with a net 10% who were underweight in March.
Portfolio managers are more optimistic on Chinese growth that at any point since 2003. A net 26% of respondents believe Chinese economic growth will accelerate over the next 12 months. As recently as November, a net 85% were negative on the country.
“Investors looking to play the global recovery are using China and emerging markets, rather than Europe or Japan, to do so,” Hartnett says.
A net 26% of asset allocation strategists are overweight China in their portfolios, up from just +4% in March.
Commodities regaining appeal
Positive sentiment about China usually translates into positive sentiment about the commodities that country will need to fuel its continued industrialization. A net 4% of asset allocators are overweight the asset class — the first net overweight reading since August of 2008.
Gold is seen as overpriced (+7%) but oil is seen as undervalued by a net +38% of respondents despite 30% increase in the price of WTI crude prices over the last 2 months.
Sentiment on gold may flip if the mood of managers turns from its current deflationary view to one that expects inflation to rise over the long term. There is some evidence in the survey to suggest this is the case.
Inflation expectations remain negative, at a net -14%, but are on a “sharp” downward reversal since the beginning of this year.
“With a growing belief in the reemergence of inflationary risks, it is understandable to see expectations for both short and long term rates moving higher,” the report says. “A net 16% now see short term rates higher over the coming 12 months this is the first positive reading in 10 months.”
(04/16/09)
 | Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com |