Allocation to real estate, alts hits five-year high
Investors remain staunchly optimistic despite signs that risk assets are vulnerable post-rally, with allocations to real estate and alternatives touching five-year highs and expectations for corporate profits surging.
Globally asset allocators are staying overweight equities (net +51%) and underweight bonds (net -47%) and cash, finds the Bank of America Merrill Lynch fund manager survey for February. Month-on-month changes in allocation were modest.
They are at their most bullish on EM equities at a net 43% overweight, followed by an 8% overweight on eurozone (trimmed from +15%). Optimism over Japanese equities rose modestly to a net 7%, although there’s room to grow given allocations from 2003-07 averaged 31% overweight.
Interestingly, US investors are now the most overweight they have ever been in the survey on US banks at a net 24% overweight, and at their most bullish on global banks since 2007.
They see an improved outlook for profits, with a net 39% expecting profits worldwide to rise in the coming 12 months, up from 29% in January.
Further, a net 48% of investors believe capital expenditure is the best use of corporate cash – the highest reading since April 2011. A net 13% of global investors say equities are undervalued, and a net 82% say bonds are overvalued.
“The continued high level of optimism is a concern and markets may be vulnerable to bad news, but valuation support suggests any correction should be short and shallow,” says Michael Hartnett, chief investment strategist at BoA Merrill global research. “Our core great-rotation theme remains in play.”
Emerging market managers are more cautious than the global players, although as a clear exception they have a net 50% overweight on China – the highest level in the survey for a year.
Thailand, along with Russia and Turkey, are the only other countries they have consensus overweights on. But sentiment on Brazil continues to deteriorate, with allocations sinking to -42%, the lowest level on record.
Asian houses maintain their own 34% overweight on China, and notably have also raised their weighting to Indonesia and Thailand in the past month. At the same time they have reduced allocations to South Korea and Australia (now their two least favoured countries).
Among portfolio managers in Europe, growth expectations for the eurozone jumped to a net 34% in February, the highest level in two years.
But the overweight in EU equity dropped to 8% in February, from 15% the month before. A net 49% see EU earnings-per-share estimates as too high and 12% still expect a recession in Europe.
“Investors are striking a balance between the optimism over growth and caution over investment decisions,” says John Bilton, European investment strategist at BoA Merrill. “Investors have so far resisted taking an exuberant stance.”
By sector, global investors saw a big rotation to both pharma (now the world’s most popular sector) and staples, and out of energy, materials and technology (down to its lowest overweight since February 2009). Weightings in telecoms and utilities sank to their lowest levels since 2004.
Among EM investors, only consumer discretionary (+42%) and tech (+25%) were consensus overweights, while financials fell to neutral for the first time in six months.
In Asia, managers dramatically increased their allocations to autos (+56%), and more modestly to utilities and consumer staples (although both remain net underweights). They cut exposure to basic materials, media and telecoms.
European houses continue to dislike domestic EU sectors, with utilities (-49%), telcos (-27%) and retail (-27%) the core shorts. But as BoA Merrill notes, this stance will be vulnerable if their renewed hopes for EU growth become a reality.
In all, 251 panellists with $691 billion in AUM participated in the BoA Merrill survey from February 1 to 7. A total of 194 managers took part in the global survey and 130 in the regional poll, with some overlap.