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Fund managers are moving back into US equities for the first time in 15 months but are still concerned that companies have taken on too much debt, according to the latest Bank of America Merrill Lynch fund manager survey.
The survey, which questioned nearly 200 global fund managers at the beginning of June, revealed the US is back in favour following concerns its market was over-valued after a nine-year bull run.
The number of managers allocating to US equities climbed 16 percentage points to net 1%, the first time in 15 months a majority have liked its stock market. The majority, 64%, of managers think the US has the most favourable outlook for profits, marking a 17-year high. The US is the only region where managers believe the outlook is positive, as all other regions have a net negative profit outlook.
The survey showed that fund managers still favour defensive stocks over economically exposed cyclicals, selling out of banks, emerging equities, and eurozone equities.
Commodities also increasing in popularity, with allocation at an eight-year high as the oil price rose. Allocation to the energy sector is now at a 17% overweight, a six-year high, and commodities overall are at a 7% overweight, the highest since oil prices hit more than $100 in April 2012.
Over the month average cash balances were reduced from 4.9% in May to 4.8% in June, although still above the 10-year average of 4.5%.
While managers may believe in prospects for company profits, they were worried about the amount of debt that businesses have taken on. A record 42% of investors said companies are over-levered, far exceeding the 32% peak in 2008.
The number of managers who believe corporate balance sheets are overleveraged in general is also at an all-time high of 34%.
Bank of America Merrill Lynch chief investment strategist Michael Hartnett said: ‘Investors have their eyes on the US this month. With a record high favourable outlook for profits and a return to US equity allocation, decoupling is back in vogue.’
The US does pose some risks, however, as the US Federal Reserve pushes on with its plan for quantitative tightening and president Donald Trump continues to worry markets with rhetoric around trade tariffs.
A total of 69% of investors believe that the Fed will only stop the tightening of monetary policy – which has included six interest rate rises – for domestic reasons, such as lower inflation, higher unemployment, and Fed independence.
Another 23% believe it could change course if there was emerging market contagion or a debt crisis in the European Union.
A trade war is still the biggest risk to markets, according to 31% of those surveyed, a hawkish policy mistake from the Fed or European Central Bank is also a concern for 26% of investors. A euro or emerging market debt crisis is worrying 23% of investors.
These concerns seem to be keeping expectations about future growth on the back burner as just net 1% of investors believe the global economy will strengthen over the next 12 months, which is barely above the boom/bust threshold and still the lowest number registered since February 2016.