Investors are looking forward to 2010 as a year of moderate economic growth, benign inflation and solid returns in global equities, according to the BofA Merrill Lynch survey of fund managers for December.
Optimism about the economy strengthened this month. A net 80 per cent of respondents expect the world economy to grow over the next 12 months, compared with a net 69 per cent in November.
Two thirds of investors expect equity markets to return to traditional growth levels or better.
Expectations for corporate profits are at their highest level since December 2003, supporting demand for greater capex. A net 48 per cent of investors say that companies are under-investing. At the beginning of 2009 most investors thought companies were over-investing.
Concern about inflation remains subdued. A growing proportion of survey respondents do not expect interest rate hikes from the Fed before the second half of the year, a view echoed by European investors on the ECB.
"Investors are nervous but optimistic heading into the New Year; and respondents are looking for a 7.7 per cent total return from global equity markets," says Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.
The positive outlook comes in spite of sharp movements out of bank stocks. A net 28 per cent of respondents are now underweight bank stocks compared with 11 per cent in November, a monthly swing of 17 per cent.
"A year ago strong pessimism over bank stocks would have spread across the market, but now it appears to be isolated to the banks. Investors seem to be saying they can be optimistic on markets even without bank support" says Gary Baker, head of European equity strategy at BofA Merrill Lynch Global Research.
After months on the sidelines observing an economic recovery but sticking with defensive equities, European investors have taken the plunge into riskier assets. Respondents to the European regional survey have reduced their cash holdings and shifted towards cyclical stocks.
A net six per cent of the panel is underweight cash, compared with a net 18 per cent in November. A net 82 per cent of the regional panel expects improved earnings in 2010, a five-year high and up from a net 69 per cent in November.
Among the sectors benefitting from the new-found optimism were chemicals, basic resources and construction. For example, chemicals experienced a positive swing of 37 per cent with a net six per cent of investors overweight the sector in December, compared with a net 31 per cent underweight in November.
Mirroring the trend seen in the global survey, European investors have become significantly more bearish on bank stocks. A net 37 per cent of respondents are underweight the sector, up from 26 per cent in November.
China is seen driving growth within emerging markets with 61 per cent of the panel in Asia-Pacific (ex Japan) believing China’s economy will be stronger 12 months from now, up from 44 per cent the previous month. But confidence is also rising in Korea and Taiwan with 20 per cent of the panel expressing a desire to overweight equities in each market next year. A month ago only four per cent of respondents backed South Korea and a net four per cent were underweight Taiwan.
Investors’ views on the fortunes of major world currencies have firmed significantly in the past two months, with the panel convinced that the US dollar will strengthen and the yen weaken. A net 37 per cent project the dollar will appreciate over the coming 12 months, compared with just five per cent taking that view in October. A net 35 per cent predict the yen will depreciate, up from a net 11 per cent in October. While the dollar is expected to gain, gold is tipped to fall in value with 50 per cent of the global panel saying the metal is overvalued, up from 40 per cent in November.
