Fund Managers Turning Pessimistic

BofA Merrill Lynch Fund Manager Survey Finds Investors at Most Pessimistic Since Summer 2011

Fears of a global economic slowdown have come sharply back into focus, and

expectations of decisive action by policy makers have grown, according to the

BofA Merrill Lynch Survey of Fund Managers for June.

A net 11 percent of the global panel believes that the global economy will

deteriorate in the coming 12 months – the weakest reading since December 2011.

Last month, a net 15 percent believed the economy would strengthen and the

negative swing of 26 percentage points is the biggest since July-August 2011

as the sovereign crisis built. The outlook for corporate profits has suffered

a similarly negative swing. A net 19 percent of the panel believes that

corporate profits will fall in the coming 12 months. Last month, a net 1

percent predicted improving corporate profits.

Investors have adopted aggressively “risk off” positions. Average cash

balances are at their highest level since the depth of the credit crisis in

January 2009 at 5.3 percent of portfolios, up from 4.7 percent in May. The

Risk & Liquidity Composite Indicator fell to 30 points, versus an average of

40. Asset allocators have moved to a net underweight position in global

equities and increased bond allocations.

Support for policy stimulus has grown. The majority of the panel now believes

that global monetary policy is “too restrictive.” A net 6 percent take that

view, the highest since December 2008. A net 15 percent said policy was “too

stimulative” in May. The proportion of global investors saying global fiscal

policy is “too restrictive” has continued to rise to a net 28 percent from a

net 23 percent in May.

“Investors have taken extreme ‘risk off’ positions and equities are oversold,

but we have yet to see full capitulation. Low allocations in Europe are in

line with perceptions of growing risk levels in the eurozone,” said Gary

Baker, head of European Equities strategy at BofA Merrill Lynch Global

Research. “Hopes expressed last month of a policy response have now become

expectations. Markets are keenly anticipating decisive action from key policy

meetings in June,” said Michael Hartnett, chief Global Equity strategist at

BofA Merrill Lynch Global Research.

Global equity under-valuations match all-time low

Global equities are at their most undervalued since August 2011. A net 48

percent of the global panel believes global equities are undervalued, matching

the lowest level since the survey began. The reading is up from a net 35

percent in May and a net 22 percent in April. At the same time, a net 83

percent of the panel says that bonds are overvalued – also an all-time high

and up from a net 74 percent a month ago.

The view is even more concentrated in Europe. A net 45 percent of the global

panel sees Europe as the most undervalued region - an all-time high reading

and up from 27 percent in May.

Asset allocators moved out of global equities with a net 4 percent underweight

the asset class, compared with a net 16 percent overweight equities last

month. They reduced their underweight position in bonds to a net 23 percent,

down from a net 33 percent in May. Global investors have reached their closest

position to being equal weight equities and bonds since November 2011.

Fears resurge of Chinese hard landing

Last month’s growing optimism about China’s economy has halted in June’s

survey. The panel is equally split about whether China’s economy will get

stronger or weaker in the year ahead; last month, a net 10 percent predicted

it would strengthen. Significantly, 16 percent of respondents now believe

China’s economy faces a “hard landing” – up from 9 percent in May.

Broadly, sentiment towards emerging markets has softened. A net 17 percent of

global asset allocators are overweight Global Emerging Market equities – down

from a net 34 percent in May. Commodities have also lost favor. A net 8

percent of the panel is underweight the asset class, the lowest reading since

February 2009.

Allocation by global asset allocators to U.S. equities improved with a net 31

percent overweight U.S. stocks, up five percentage points month-on-month. In

contrast, domestic investors have turned bearish. A net 36 percent of U.S.

respondents to the Regional Survey expect the U.S. economy to deteriorate in

the coming 12 months.

Back to the old counter-cyclical routine

In line with the “risk off” mood, investors reached for their counter-cyclical

auto-function key again this month. Allocations to Pharmaceuticals, Utilities,

Telecoms and Staples all rose from May’s levels. The biggest reductions in

sector positions came in Materials, Energy and Industrials. Technology remains

the most favored sector.

Survey of Fund Managers

An overall total of 260 panelists with US$689 billion of assets under

management participated in the survey from 31 May to 7 June. A total of 188

managers, managing US$522 billion, participated in the global survey. A total

of 141 managers, managing US$297 billion, participated in the regional

surveys. The survey was conducted by BofA Merrill Lynch 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.