Fund managers pessimistic about growth

FUND managers are highly pessimistic about the outlook for global economic growth and corporate profits. But sharp falls in world stock markets mean that global equities are now perceived to be at their most undervalued since March 2009, according to the June Bank of America-Merrill Lynch fund manager survey, published yesterday.

Only a net 24 per cent of fund managers think that the world economy will strengthen over the next 12 months compared with 42 per cent in May and 61 per cent in April. Confidence in China as an investment destination has fallen sharply to its lowest level since January 2009 – a net 27 per cent of fund managers expect the Asian powerhouse to weaken over the next year (see chart). This was a sharp turnaround in sentiment from April when a net 21 per cent predicted that the Chinese economy would improve. Consequently, only a net 4 per cent of investors are overweight Chinese equities ,compared to 17 per cent a month ago.

In contrast, fund managers are becoming more positive about opportunities in equities and European stocks in particular. Global investors are feeling more hopeful about the outlook for Europe’s stocks and the euro: tellingly, only 12 per cent of investors identified the Eurozone as the region they would most like to underweight, compared with 30 per cent in May. More than half of European fund managers think that Eurozone equities are undervalued and a quarter of global investors say it is the cheapest region.

The survey evidence is backed up by the most recent fund flow data from EPFR Global, a data firm. In the week ending 9 June, there was some interest in funds investing in regions, countries or sectors that could prove to be oversold, with Europe funds absorbing fresh money.

Technology and financial sector funds also saw inflows. The BoA-ML survey reveals that technology equities are by far and away the most favoured by fund managers, with a net 41 per cent overweight.

In contrast, the oil spill in the Gulf of Mexico has caused global investors to slash their energy weightings. Just 7 per cent are overweight in June compared to 37 per cent in May. However, European fund managers bucked the trend and actually increased oil weightings.

Gary Baker, head of European equity research at BoA-ML Global Research, says that this is possibly because European investors had to confront the situation earlier. Global energy funds saw outflows of $346m in the week to 9 June.

Those investing in funds should therefore also be preparing for an increase in their exposure to European equities.