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Investors spy global growth in Japan, Europe & emerging markets

Fund managers set aside fears over North Korea and central bank monetary policy to turn bullish on global economy, according to latest BofA Merrill Lynch survey.

Investors spy global growth in Japan, Europe & emerging markets

Fund managers have set aside fears over North Korea and central bank monetary policy to turn bullish on the global economy.

According to a BoA Merrill Lynch survey, a record 48% of fund managers expect above-trend economic growth and below-trend inflation, the so-called ‘Goldilocks’ scenario. 

A net 41% of fund managers polled earlier this month think the global economy will strengthen this year, chiming with an IMF forecast that growth will rise slightly from 3.6% to 3.7% next year. This is up from 25% last month but well below the net 62% who were positive in January.

As a result in the past month they have rotated out of utilities, emerging markets, healthcare and government bonds and invested in bank stocks and Japan, both of which do well when interest rates are rising.

A sign of fund manager confidence was that the average cash balance in their portfolios had fallen to 4.7% from 5.8% a year ago. BoA Merrill Lynch views cash as a contrarian signal to go bearish, or negative, when investors get overly confident and cash levels decline; and vice versa to become bullish when fund managers are worried and cash holdings are high.

‘Cash balances dipped this month but remain somewhat elevated. A faster drop in cash leading into 2018 would indicate a sell signal from investors,’ cautioned Michael Hartnett, chief investment strategist.

For the fifth time this year being ‘long’, or positive, on technology stocks on the US Nasdaq exchange was considered to be the most ‘crowded’ or popular  trade by 29% of the 207 fund managers polled. This was followed by 18% citing US and European corporate bonds and 16% mentioning Eurozone equities as the biggest consensus positions.

Europe is seen as a good play on the global economy. Ronan Carr, BoA Merrill Lynch European equity strategist, said: ‘Europe is in vogue according to global investors, with the overweight in eurozone equities back near record highs and EPS [earnings per share] expectations accelerating.’

By contrast, Japan remains slightly out of favour. ’More investors are saying they want to overweight Japan over the next 12 months but that still lags behind Europe and EM,’ said Shusuke Yamada, chief Japan FX/Equity strategist. 

The danger of the US Federal Reserve or European Central Bank choking off the recovery by unwinding their emergency support too quickly was viewed as the biggest ‘tail risk’ facing investors, followed by a crash in global bond markets which looked too expensive. 

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