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BofA Merrill Lynch Fund Manager Survey Investors Turning to Cash as Geopolitics and Interest Rate Rise Fears Bite

August 12, 2014

Europe Bears Brunt of Falling Sentiment but Emerging Markets Thrive


NEW YORK--(BUSINESS WIRE)-- Rising geo-political temperatures combined with the threat of rising U.S. interest rates have led global investors to scale back risk and take cash levels to two-year highs, according to the BofA Merrill Lynch Fund Manager Survey for August.

Investors have shifted robustly into cash with a net 27 percent of respondents to the global survey overweight cash in August, up from a net 12 percent in July. Cash now accounts for an average of 5.1 percent of global portfolios, up from 4.5 percent a month ago. Both cash readings are at their highest since June 2012. The proportion of asset allocators overweight equities has tumbled by 17 percentage points in one month, to a net 44 percent in August. The number of survey respondents hedging against a sharp fall in equity markets in the coming three months has reached its highest level since October 2008.

Global growth predictions have fallen since July but remain firm. A net 56 percent of the global panel expects the economy to strengthen in the year ahead, a fall from a net 69 percent in the previous month. However, sentiment towards Europe has fallen significantly – the earnings outlook for the region suffered its greatest monthly fall since the survey started.

Fears of a geopolitical crisis is the biggest cause of risk-reduction – with 45 percent of respondents naming it their number one “tail risk” this month, up from 28 percent a month ago. But a new question in the survey highlights how a rate hike is also playing on investors’ minds – 65 percent of the panel expects a U.S. rate rise before the end of the first half of 2015.

“The market melt-up is over, or at least on pause, as investors seek refuge while they digest world events and the prospect of higher rates,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research. “We see further de-risking to come in Europe. Negativity in this month’s survey towards Europe reflects growing softness in economic data from both the core and periphery of the region,” said Manish Kabra, European equity and quantitative strategist.

Europe’s gloss is lost

Europe’s status as the world’s market darling for much of 2014 has all but evaporated in the past month, with a big negative swing in the number of investors currently overweight European equities and an even greater negative swing in sentiment about the future.

A net 13 percent of asset allocators are overweight Eurozone equities – a fall of 22 percentage points in one month. U.S. equities also lost ground but only a 4- percentage point drop to a net 6 percent. Furthermore, a net 30 percent of global investors believe that the 12-month profit outlook is worse is Europe than in any other region. That reading has fallen 24 percentage points since July – a record one-month swing.

It’s not surprising therefore that Europe has now become more of a region to underweight than overweight. A net 4 percent of investors want to underweight Europe more than any other region. In July, a net 10 percent wanted to overweight Europe. The survey also highlights growing pressure on the euro. A net 40 percent saying that it is the currency they most expect to depreciate (on a trade-weighted basis), a reading that represents a two-year high in negativity towards the euro, up from a net 28 percent in July.

Emerging markets shine again

Global Emerging Markets (GEM), and to a lesser extent Japan, have bucked the wider global trend of pessimism. A net 30 percent of asset allocators are now overweight Japanese equities, a rise from a net 26 percent in July and making Japanese equities the most popular of the five regions.

GEM has shown the greatest momentum, with the proportion of asset allocators overweight the region rising to a net 17 percent from a net 5 percent in July. Behind the improvement is stronger belief in China and in commodities. A net 6 percent of regional fund managers expect the Chinese economy to improve in the coming 12 months – the first positive outlook of 2014. Just two months ago, a net 42 percent forecast China’s economy to weaken.

Fewer global asset allocators are underweight commodities – a net 5 percent compared with a net 15 percent in July. Looking ahead, a net 21 percent of investors say that GEM is the region they most want to overweight in the next 12 months, up from a net 4 percent in July.

Investors pursue big caps and value

Investors have expressed unusually strong opinions in favor of large-cap stocks and value-driven investment this month. The proportion of respondents favoring value over growth investing has reached a record level of a net 48 percent. Value investing is typically in favor during “risk off” phases, but the high this month outstrips even previous highs in 2009 in the aftermath of the financial crisis. A net 59 percent believe that large caps will outperform small caps, the highest reading in two years.

Fund Manager Survey

An overall total of 224 panelists with US$675 billion of assets under management participated in the survey from 1 August to 7 August 2014. A total of 177 managers, managing US$529 billion, participated in the global survey. A total of 112 managers, managing US$278 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Global 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.

BofA Merrill Lynch Global Research

The BofA Merrill Lynch Global Research franchise covers more than 3,500 stocks and 1,180 credits globally and ranks in the top tier in many external surveys. Most recently, the group was named Top Global Research Firm of 2013 by Institutional Investor magazine; No. 1 in the 2014 Institutional Investor All-Europe survey; No. 1 in the 2014 Institutional Investor All-Asia survey for the fourth consecutive year; No. 1 in the Institutional Investor 2014 Emerging EMEA Survey; No. 2 in the 2013 Institutional Investor All-America survey; No. 2 in the 2013 All-Latin America survey; and No. 2 in the 2013 All-China survey. The group was also named No. 2 in the 2014 Institutional Investor All-Europe Fixed Income Research survey; and No. 2 in the 2013 All-America Fixed Income survey for the second consecutive year.

Bank of America

Bank of America is one of the world's leading financial institutions, serving individual consumers, small businesses, middle-market businesses and large corporations with a full range of banking, investing, asset management and other financial and risk management products and services. The company provides unmatched convenience in the United States, serving approximately 49 million consumer and small business relationships with approximately 5,000 retail banking offices and approximately 16,000 ATMs and award-winning online banking with 30 million active users and more than 15 million mobile users. Bank of America is among the world's leading wealth management companies and is a global leader in corporate and investment banking and trading across a broad range of asset classes, serving corporations, governments, institutions and individuals around the world. Bank of America offers industry-leading support to approximately 3 million small business owners through a suite of innovative, easy-to-use online products and services. The company serves clients through operations in more than 40 countries. Bank of America Corporation stock (NYSE: BAC) is listed on the New York Stock Exchange.

Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated, which is a registered broker-dealer and a member of FINRA and SIPC, and, in other jurisdictions, locally registered entities. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured * May Lose Value * Are Not Bank Guaranteed.

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Source: Bank of America


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