Investor optimism over US equities has declined sharply amid expectations the Federal Reserve will raise interest rates in the second quarter, while concern over mounting debt in China has tempered the outlook for stocks in Asia, according to the Bank of America Merrill Lynch (BofAML) Fund Manager Survey.
At the same time, European stocks are gaining appeal with international investors as the European Central Bank (ECB) launches its $1 tn quantitative easing program meant to kick-start the region’s economy and head off deflation.
A net 19 percent of asset allocators worldwide are now underweight US equities, the biggest proportion since January 2008, says BofAML in a press release. The underweight level is a sharp reversal from a net 6 percent overweight in February.
BofAML says the shift away from US stocks will likely continue in the coming months with a net 23 percent of investors saying they are overvalued, the highest level since May 2000. More than a third (35 percent) of global fund managers surveyed say the US is the area they most want to underweight, the most negative level in 10 years.
By contrast, a net 63 percent of fund managers surveyed say Europe is the region they would most like to overweight over the coming 12 months, bringing the spread between Europe and the US to 98 net percentage points, the highest level ever recorded by the BofAML survey.
‘Bullishness toward European stocks has reached uncharted territory,’ says Manish Kabra, European equity and quantitative strategist with BofAML. ‘Demand for financials highlights confidence in domestic growth, while belief in European exporters is building on gains seen last month.’
Concerns of a default in China, meanwhile, have soured investors’ outlook in the region. A Chinese default is now cited by 19 percent of investors as their biggest risk, up from 14 percent a month earlier. It is now the second-biggest risk, after a ‘geopolitical crisis’.
