Managers defy the fiscal cliff to buy shares

Asset managers around the world are selling government bonds and investing in equities in anticipation of a strengthening global economy, despite the looming shadow of the US fiscal cliff, shows the latest monthly survey from Bank of America Merrill Lynch.

  Equity allocations have risen significantly since last month, according to the monthly survey of asset managers’ attitudes published by Bank of America Merrill Lynch Global Research. A net 24% of managers are overweight in equities, up from a net 15% in September.

  When the survey asked what managers would sell to fund the purchase of equities, the number one pick – attracting 37% of the responses – was to sell government bonds. This is the first time this question has been asked.

  The allocations reflected growing optimism. A net 20% of managers now believe the global economy will strengthen in the coming 12 months, a rise of three percentage points since last month. Although a net 11% of investors said corporate profits will fall in the coming year, this is substantially lower than it was a month ago, when it was a net 28%.

  However, 72% of managers said the fiscal cliff is not substantially priced into global equities and macroeconomic data. Forty-two percent of respondents to the survey identified the fiscal cliff as the number one tail risk, up from 35% in September and 26% in August. The fiscal cliff – when expiring Bush-era tax cuts collide with increased costs associated with President Barack Obama’s healthcare reforms and spending cuts – has overtaken EU sovereign debt funding risk as the main threat.
A net 27% of the respondents described the EU issue as their number one risk, down from a net 33% a month ago and far lower than the 65% of June.

  Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch Global Research, said: “While the US fiscal cliff is a hurdle, growing belief in the global economy could spur a more ‘risk on’ stance from investors.”

   John Bilton, European investment strategist at Bank of America Merrill Lynch Global Research, said: “The outlook for European equities is improving, eurozone fears are receding and appear largely priced into equity risk premia; core government bonds offer negative real yields, so the impetus to rotate into stocks in Europe, as the outlook stabilises, is profound.”

  However, managers have become more bearish on Japan as concerns grow over a dispute with China over the Senaku Islands and its impact on trade. A net 38% of managers are underweight Japanese equities, the lowest reading since March 2009. Moreover, for the second month in a row, a net 24% of investors said Japan is the region they most want to underweight.

The survey took place from October 5 to October 11, involving 200 managers with $561bn.