Following the recent oil price spike, investors fear for corporate profitability and global growth, according to the BofA Merrill Lynch Survey of Fund Managers for March.
A net 24 per cent of asset allocators now expect corporate operating margins to fall over the next 12 months. This represents the sharpest month-on-month decline since the survey began asking this question in 2004. As recently as January, a net 10 per cent were expecting margins to expand. A net 32 per cent of fund managers still look for corporates to increase profits in the next year, but this is down significantly from a net 51 per cent a month ago. A net 31 per cent now view consensus earnings estimates as too high, moreover.
This decline in confidence is reflected in the survey participants’ macroeconomic outlook. A net 31 per cent of fund managers still believe the global economy will strengthen in the next year, but this is down from a net 51 per cent last month. In the US the fall was even sharper, from a net 52 per cent to a net 21 per cent, while respondents in Asia outside Japan turned negative. A net 25 per cent see the region’s economy weakening over the period.
While fears of recession remain remote, the threat of stagflation has risen, according to the survey findings. In the space of two months the proportion of fund managers anticipating below-trend growth and above-trend inflation has doubled to 38 per cent. Among four possible outlooks, this is now the most common among respondents.
Investors do not expect US interest rates to rise any sooner as a result of the oil price shock. Three-quarters of them still see a rate hike within 12 months. But a net 35 per cent expect the yield curve to flatten over the period, up from a net 14 per cent in February.
No fewer than 72 per cent now think the ECB will raise rates before July. No respondents held this view last month.
"The shift in the March survey is toward stagflation, with lower growth expectations and higher inflation and interest rate expectations causing cash levels to rise." says Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research.
Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research, says: “If the oil price reverses, this change in sentiment could prove quite fleeting. There has been no massive sell-off. Investors are in ‘wait-and-see’ mode."
Investors have increased their cash holdings in response to the uncertain outlook. A net 18 per cent are overweight cash, compared to a net 3 per cent underweight in February. Globally, their average cash balance rose to 4.1% of portfolios in March. This compares with 3.5% one month earlier.
They have also reduced exposure to equities and commodities. A net 45 per cent report being overweight equities in March, down from February’s net 67 per cent; commodity overweights fell to a net 21 per cent. A net 8 per cent are taking a lower level of risk than normal, compared to a net 1 per cent taking higher than normal risk a month earlier.
Strikingly, this has not translated into greater enthusiasm for bonds. Investors’ underweight of this asset class remains a net 59 per cent, down only slightly from the previous month.
Investors have also not altered their sector allocations significantly. Their appetite for technology growth stories is still high, while they are still overweight cyclicals like basic materials and industrials too. They also remain underweight defensives such as consumer staples and utilities, though they have turned positive on pharmaceutical and healthcare stocks.
Regionally, appetite for US equities declined. Fund managers’ overweight fell a net 23 per cent, down from a net 34 per cent. In the US only a net 4 per cent of survey respondents see companies there increasing earnings per share (EPS) in the next year, versus 43 per cent in February.
European investors’ underweights on the auto and personal household goods sector increased sharply to a net 20 per cent and a net 30 per cent, respectively. Confidence in China Picks Up.
The survey shows the recent erosion of confidence in emerging markets starting to turn. A net 15 per cent of regional fund managers now expect the Chinese economy to weaken in the next year, down from a net 27 per cent in February. Globally, the identification of the Chinese real estate market as a major tail risk has also declined.
Overall, investors are neutral on emerging markets equities. Two months earlier a net 43 per cent were overweight.
A total of 203 fund managers, managing a total of USD602 billion, participated in the global survey from 4 March to 10 March. A total of 168 managers, managing USD395 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS.
