Investor optimism over the global economic outlook has fallen in October as political strife in the US leads investor concerns.
A net 54 percent of investors this month believe the global economy will strengthen in the coming 12 months, down from a net 69 percent in September, according to the Bank of America Merrill Lynch (BofAML) fund manager survey for October. The number of investors who expect growth to remain ‘below’ trend, meanwhile, has risen to a net 71 percent from a net 61 percent.
Concern about the outlook for the US economy, which heightened this month during a political stalemate over the debt ceiling, leads investors’ fears, with a net 24 percent saying fiscal tightening is now the main tail risk to the world economy, an increase from 6 percent last month.
A partial shutdown of the US government ended on October 17 as Congress voted to raise the national debt limit, easing fears of a US default. But politicians will continue the debate over government finances in coming months as Congress discusses social security and taxes, and a new debt ceiling deadline looms in February next year.
Investors’ expectations for corporate profits have also dropped sharply in October, with a net 28 percent expecting improvement, compared with a net 41 percent in the September survey. The number forecasting a drop in corporate profits over the coming year has risen to a net 18 percent from a net 11 percent.
‘Events in Washington clearly caused investors to shift back toward their benchmarks, but asset price gains can still be driven by high cash levels,’ says Michael Hartnett, chief investment strategist at BofAML Global Research, in a press release.
But BofAML Global Research’s European investment strategist, John Bilton, says Europe is a bright side in the global economic picture, with a net 46 percent of asset allocators positioning themselves as ‘overweight’ Europe, the highest level since 2007.
‘The story in my mind is really Europe,’ Bilton said at a news conference in London. ‘The region that was the number one tail risk five months ago is now thought of as underbought. Europe valuations are supportive.’
Bilton also noted that expectations for corporate profits in Europe are rising, too, with a net 6 percent of Europeans who took part in the survey saying double-digit profit growth for companies in Europe is likely in the coming 12 months. In the September survey, a net 55 percent said that level of growth was unlikely.
In total, 183 fund managers with $643 bn in assets under management took part in the global survey from October 4 to October 10.
