Global fund managers starting to get bullish

A bullish mood is filtering back into global markets judging by the results of the latest poll of fund managers by Merrill Lynch.

According to the survey of 220 global fund managers earlier this month, about 3 out of 5 are of the view that the global economy will improve over the next 12 months, up from 26% in April.

It's the highest reading since early 2004 and a sharp contrast to the dark days last October when a net 60% were forecasting a worsening outlook.

But perhaps the most significant revelation of the survey is the turnaround in corporate profit expectations.

For the first time since March 2005, the respondents have expressed their expectations that corporate profits will improve in the next 12 months, which is a big swing from April when a net 12% were bearish about profits.

More than a quarter of the fund managers surveyed were also forecasting that earnings per share (EPS) growth would exceed 10%.

With the positive expectations over corporate profits, many portfolio managers are backing their optimism with action. Average cash holdings have fallen to 4.3% in May from 4.9% in April. Many of the respondents have moved to a net underweight position in bonds for the first time since last August.

The May survey also saw a major shift out of defensive investments. For the first time since early 2005, a majority of respondents are currently underweight in their favourite recessionary sector – that is pharmaceuticals – compared with a net 21% who were overweight in April.


Sector Weightings for May among global fund managers



Investors have also reduced their holdings in staples, telecoms and utilities in favour of energy, materials and industrials. The utilities sector is currently the most underweight sector (1 out of 4 respondent) while the underweighting for the banking sector is receding and at its lowest level since June 2007, as more fund mangers start to increase their allocations in banks.

"Having addressed their most urgent priority by returning to financial stocks, investors have added exposure to cyclical, real economy stocks and further purged defensive overweight positions," noted Gary Baker, Banc of America Securities-Merrill Lynch co-head of international investment strategy.

Many are rushing to global emerging markets (GEM) with a record net 46% or nearly half of the fund managers surveyed looking to take an overweight stance for the next 12 months, up from 26% in April.

Outside of emerging markets, US equities remain the most favoured region for asset allocators, despite sideways performance, while the Eurozone (-20%) and Japan (-31%) remain heavily underweight.

Investor optimism over China's economy is also higher than at any point in the past six years. A net 61% of respondents see its economy improving, again a sharp contrast to the findings last November when a net 87% of respondents expected the Chinese economy to weaken.

"Investors are finally opening their wallets and reducing cash balances to mid-cycle levels to buy equities, cyclical stocks and risky assets," said Michael Hartnett, Banc of America Securities-Merrill Lynch co-head of international investment strategy.

"However, this rush to take on risk, especially in emerging markets is reminiscent of bubble-like behaviour. A record net 40% of fund managers are looking to overweight the region in the next 12 months," he noted.

GEM is the preferred asset class in currencies with a net 47% of investors viewing them as undervalued. Sterling is the other standout with 24% seeing it as undervalued, while the US dollar (18%), yen (20%) and Euro (20%) are all seen as similarly overvalued.

Despite the sharp recovery in the oil price in recent months, it is still viewed as modestly undervalued by investors. With the rise in global growth optimism centred on China's prospects, commodities continued to attract investment to a net 7%, a modest pickup on last month. The view on gold overvaluation held steady at a net 7%.

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