Fund managers favour U.S. stocks amid EU crisis: Merrill survey

Date: Wednesday, May 19, 2010
Author: Investment Executive

The United States is a safe haven for institutional investors once again, as fund managers are shying away from Europe and emerging markets, according to the latest the BofA Merrill Lynch Survey of Fund Managers.

The survey, which was conducted from May 7 to 13, finds that global investors are buying U.S. equities and retaining confidence in the U.S. dollar. However, they are also seeking safety in cash, as average cash balances rose to 4.3% from 3.5% in April, and the proportion of investors overweight global equities slipped sharply to 30% from 52% in April.

However, the number of respondents overweight U.S. equities ticked upwards in April, and 66% expect the U.S. dollar to appreciate the most of the reserve currencies. Additionally, the gulf in confidence between U.S. and European corporate profit has reached a seven-year high, it found.

“May’s survey highlights a flight to the U.S., driven by the uncertainty in Europe and underscores a positive U.S. growth outlook,” said Michael Hartnett, chief global equities strategist at BofA Merrill Lynch Global Research.

“The survey shows that investors have capitulated on Europe, beaten down by sovereign debt concerns and faltering growth expectations,” added Gary Baker, head of European equities strategy.

Concerns in both the eurozone and emerging markets have shaken investors’ confidence in global equities and growth prospects for the global economy, the firm said. The number of investors who believe the global economy will strengthen in the next 12 months fell to 42% from 61% in April. Confidence in earnings also slipped, as 47% of the panel says that profits will improve in the next year, down from 67% in April.

The survey points to deepening negative sentiment towards Europe -- 46% expect the euro to depreciate, up significantly from 23% in April, and 30% of investors say that the eurozone is the region they would most like to underweight, the lowest reading recorded in the survey (in April just 13% said that).

Positive sentiment towards emerging market equities has also dipped to its lowest level since early 2009, the firm reported. The number of respondents overweight global emerging markets equities stands at 19% this month, down from 31% in April. The proportion of the panel saying that emerging markets have the most favorable outlook for corporate profits is 23%, compared with 34% a month ago.

Also, GEM fund managers have turned more bearish on China, with 29% of GEM investors expecting the Chinese economy to weaken in the next 12 months.

Finally, amid questions over global growth and profit expectations, fund managers are pushing back the date they expect interest rate rises to start, the survey found. Now, 90% of European investors say that the European Central Bank will not raise rates in 2010, up from 62% a month ago. And, 25% don’t see a rate rise by the U.S. Federal Reserve before April 2011, compared with 10% a month ago. Only 39% of the panel expects a U.S. rate increase in 2010, compared with 56% in April.