Global investors are significantly more positive on the outlook for Europe after the European Central Bank’s announcement of quantitative easing to reflate the region’s economy, according to the BofA Merrill Lynch Fund Manager Survey for February.
Europe’s profit outlook is at its best since 2009, according to panel members. A net 81% of regional specialists see the economy strengthening in the next year.
Against this background, a record net 51% make the region their top pick in equities over a one-year horizon, up from January’s net 18% A net 55% are already overweight, the survey also revealed.
The US has been the main loser from this rotation. Overweights on US equities have declined to a net 6%, down 18 points versus last month.
Overall, fund managers have increased their allocations both to stocks and cash, according to BofA.
This is at the expense of bonds, which are now seen as overvalued by a net 79%. Bonds are also perceived as the asset class most vulnerable to increased volatility this year.
Despite exuberance over Europe, the global growth outlook is little changed. This reflects declining expectations on China.
“The ECB has successfully vanquished global deflation fears and induced the return of reflation trades in February,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research.
“Sentiment has gotten ahead of the fundamentals on European equities. It is as if there is not a single bear left. We will need to see a strong recovery very soon to keep the bulls happy,” said Manish Kabra, European equity and quantitative strategist.
Investors’ new bullishness on Europe is strongly focused on the eurozone. Non-Euro markets are out of favour, the survey has found.
Last month, France and Italy stood out as their worst picks, but a net 42% of regional fund managers now intend to underweight the UK and Switzerland this year. They have also shifted to a negative stance on Sweden.
Autos are now European regional investors’ favored sector. A net 26% are overweight, a month-on-month gain of 12% points. The travel and leisure area has also gained support with a 10-point rise.
In contrast, banks and insurers saw notable declines in sentiment. Month-on-month falls of 32 and 20 percentage points, respectively, have taken both into underweight territory. Utilities are now the region’s least favored sector.
Anxiety over potential eurozone deflation has declined with the ECB’s QE announcement. Indeed, inflation expectations are picking up. A net 29% of fund managers expect global core CPI to be higher in a year’s time, up from a net 14% a month ago.
A potential geopolitical crisis is now clearly respondents’ major tail risk. One in three identifies it as their major concern.
Gold glisters again
China’s weakening outlook is weighing on Global Emerging Markets equities, but net underweights on GEMs have declined by 12 percentage points since January to a net 1 percent.
Sentiment towards gold is also improving. Forty percent of survey participants expect the price to be higher in 12 months’ time. Last month, bears on the precious metal still outnumbered bulls.
Only a net 3% now considers gold overvalued, compared to a net 20 percent as recently as December.
Many investors continue to see value in oil. A net 39 percent regard crude as undervalued, down slightly from January’s reading.