BofA Merrill Lynch Fund Manager Survey Finds Strong Sentiment Consolidating While Equity Valuations Retain Support

Tue Feb 12, 2013 8:30am EST

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Sentiment Towards Japanese Equities Normalizing
NEW YORK--(Business Wire)--
Confidence in a strong global economic outlook has consolidated while investors
have indicated that they see support from current equity valuations after the
recent rally, according to the BofA Merrill Lynch Fund Manager Survey for
February. 

A net 59 percent of investors believe the global economy will strengthen in the
year ahead, in line with the reading in January, which marked four consecutive
months of rising sentiment. The outlook for profits has improved with a net 39
percent of the panel saying that profits worldwide will improve in the coming 12
months, up from a net 29 percent in January. The desire for higher capital
expenditure is strong with 48 percent of investors saying that capex is the best
use of corporate cash - the highest reading since April 2011. 

Investors have indicated that they continue to perceive value in equities in
light of strong market performances of early 2013. A net 13 percent of global
investors still say that equities are under-valued. At the same time, a net 82
percent say bonds are overvalued, the second-highest level recorded by the
survey with the highest coming at the peak of the European sovereign bond crisis
in 2012. 

Risk appetite has also remained steady month-on-month. Average cash balances in
portfolios remain at 3.8 percent, though the net percentage of investors
overweight cash has fallen to 2 percent this month from 8 percent in January,
the lowest reading since February 2011. 

"The continued high level of optimism is a concern and markets may be vulnerable
to bad news, but valuation support suggests any correction should be short and
shallow, and our core 'Great Rotation' theme remains in play," said Michael
Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
"Investors are striking a balance between the optimism over growth and caution
over investment decisions. Investors have so far resisted taking an exuberant
stance," said John Bilton, European investment strategist. 

Equity allocations stay high but bias shifts to defensives

Allocations towards equities have held at the highs reached in January. A net 51
percent of asset allocators remain overweight global equities. Within equities,
sectoral allocations highlight a bias towards a measured easing of risk appetite
with a shift towards defensive assets. 

Pharmaceuticals, a traditional defensive sector, has returned to the number one
sectoral pick for global investors, having been third in the pecking order a
month ago. The proportion of investors overweight the sector rose to 27 percent
from 11 percent in January. 

Cyclical sectors become less popular. The biggest month-on-month faller was
Technology, which saw a negative 12 percentage point swing in the number of
investors overweight the sector. Materials also suffered a double-digit fall in
the percentage of overweights. The number of respondents overweight Technology,
Industrials and Energy also fell. 

Sentiment towards Japanese equities normalizes

Japanese equities continue to benefit from a positive shift in sentiment by
global investors. A net 7 percent of asset allocators say they are overweight
Japanese equities this month, up from a net 3 percent in February. In December,
a net 20 percent were underweight Japanese equities. 

Local sentiment and risk appetite appears strong. A net 29 percent of Japanese
investors responding to the Regional Fund Manager Survey say they are
underweight cash, up from a net 5 percent one month ago. Automotives, Technology
and Banks are the three most popular sectors domestically. 

Global investors have indicated that their positive view towards Japan will
continue. A net 21 percent of the panel says that the outlook for corporate
profits in Japan is more favorable than for anywhere else, up from a net 4
percent in January. Accordingly, a net 9 percent says that Japan is the region
they would most like to overweight. Two months ago, a net 17 percent said Japan
was the region they most wanted to underweight. 

This positive outlook comes at a time when investors see the yen as weakening,
despite the fact that the currency is close to fair value based on the IMF's
definition of currency valuation. Four out of ten respondents to the global
survey say that USDJPY rising to 100 is likely to happen before a U.S. debt
downgrade, a Spanish bailout or gold breaking through $2,000 per ounce. 

Fund Manager Survey
An overall total of 251 panelists with US$691 billion of assets under management
participated in the survey from 1 February to 7 February. A total of 194
managers, managing US$555 billion, participated in the global survey. A total of
130 managers, managing US$270 billion, participated in the regional surveys. The
survey was conducted by BofA Merrill Lynch 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 nearly 3,500 stocks and
1,100 credits globally and ranks in the top tier in many external surveys. Most
recently, the group was named Top Global Research Firm of 2012 by Institutional
Investor magazine; No. 1 in the 2012 Institutional Investor All-Asia survey for
the second consecutive year; No. 2 in the 2012 Institutional Investor All-China,
All-Europe, All-Japan and All-Latin America surveys; and No. 3 in the 2012
Institutional Investor All-America survey. The group was also named No. 2 in the
2012 Institutional Investor All-America Fixed Income survey and in the 2012
Emerging Markets Equity and Fixed Income survey, covering Emerging Europe,
Middle East and Africa. 

Additionally, BofA Merrill Lynch Global Research was named the No. 1 Global
Broker by Financial Times/StarMine, as well as ranked No. 1 in the U.S. and
Europe and No. 2 in Asia. The group was also named No. 1 in Asia and No. 2 in
the U.S. in the Wall Street Journal Best on the Street 2012 Analysts Surveys.
The group was also the winner of the Emerging Markets magazine`s EM Research
Global Award for 2010 and 2011. 

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