Bullish Sentiments Hard to Find in BofA Merrill Lynch Fund Manager Survey

Investors’ belief in global economic growth and the ability of corporations to improve profits has significantly eroded, according to a recent survey of fund managers.

The BofA Merrill Lynch Survey of Fund Managers for June found that a mere 24% of respondents felt the world economy will strengthen in the next 12 months, about half the number that thought so a month ago, and only about a third that did as recently as April, when 61% were of that opinion.

Moreover, the survey’s authors say that those global investors have expressed similar concerns over corporate profits. A net 28% of the panel of some 200 fund managers now believes that profits will improve in the coming 12 months, compared with 47% in May and 67% two months ago. The proportion of the panel expecting corporate operating margins to improve in the coming year has halved in the past two months to a net 19%.

Investors are displaying greater concern about market liquidity conditions with nearly half (42%) of the panel describing liquidity as “poor”, nearly twice the level (22%) that did so in April.  However, the survey’s authors suggest that risk appetite remains steady, with average cash balances dipping only slightly to 4.1% of the portfolio from 4.3% in May.

Inflation fears are plummeting and as a result, 80% of respondents have ruled out a Fed rate rise in 2010. The survey also hints that investors can see buying opportunities beckoning with a net 38% of the panel saying equities are undervalued, the highest reading since the market’s trough in March 2009.

“Global growth expectations have ‘double-dipped’ and positioning is more defensive but investors show little sign of panic,” said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Global Research.

That said, negative sentiment from global investors towards Europe, at its worst in May’s survey, now appears to have troughed. The report notes that June’s survey shows nearly one-in-five (19%) of the global panel is predicting the euro to appreciate over the coming year, up from 7% a month ago.  At the same time, the report says that investors’ love-affair with the US dollar has cooled. Investors are neutral about the dollar’s value, a month after a net 29% had viewed it as undervalued.

A month ago a net 30% of the panel identified the eurozone as the region they would most like to underweight, but that has now fallen sharply to just 12%, while the proportion of the panel pinpointing the eurozone as having the weakest outlook for corporate profits has slipped back to 33% from 41% in May.  The proportion of global investors underweight eurozone equities has fallen to a net 27% from 34% a month earlier.

However, fund managers within this region are at their gloomiest in more than a year. Only a net 7% of European fund managers expect the region’s economy to improve in the coming year, compared with a net 23% in May, according to the regional survey. Additionally, a mere 20% (net) of European portfolio managers predict an improvement in earnings over the coming 12 months, down sharply from 74% in April.

“Investors are starting to see the basis for Europe’s rehabilitation on the back of a more constructive outlook for the euro,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.”

A total of 207 fund managers, managing a total of US$606 billion, participated in the global survey from 4 June to 10 June. A total of 170 managers, managing US$411 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS.