Investors have changed their minds about where they are in the global economic cycle, with a growing number now saying the economy is back in a mid-cycle phase, according to Merrill Lynch’s survey of fund managers for February.
For the past two years, survey participants have described the global economy as being between its mid-cycle and late-cycle phases.
However, investors appear to have begun to recalibrate their positions, with increasing numbers now believing that the global economy is only at its mid-cycle stage.
If this is the case, then it raises the possibility there may be a further phase of economic expansion still to come, with significant implications for interest rates, the firm says. Not surprisingly, asset allocators have become less worried about the risk of an economic slowdown.
Only 20% now think the risk of lower economic growth should be the US Federal Reserve’s primary concern, compared with the 39% who took the same view in November.
“On the day Fed chairman Ben Bernanke testifies before Congress, asset allocators are clear the Fed should be more concerned about the risk of higher inflation than about the risk of slower economic growth,” says David Bowers, independent consultant to Merrill Lynch.
The survey found that asset allocators are becoming increasingly enamoured with equities. Eurozone equities are the most desired securities, with a net 47% of allocators taking an ‘overweight’ position, the highest in 18 months.
This is consistent with the view of Karen Olney, chief European equity strategist, that other asset classes in Europe, such as high yielding bonds and European property, have re-rated more than equities since the market lows of March 2003. UK property has gone from trading at a 40% discount to NAV in 2003 to trading in line with NAV today. Among global sectors, investors are attracted most strongly to technology, insurance and industrials. Utilities have lost their allure, being seen as overvalued, according to the firm.
“In alternative assets, investors appear to have fallen out of love with commodities,” notes Merrill Lynch. However, Francisco Blanch, head of Merrill Lynch’s Commodities Research in London, says portfolio managers would be wise to reassess a bearish stance on the sector, with oil prices set to rise steadily and soft commodities starting to be impacted by the early stages of a bio-fuels-led boom.