Survey: Investors Fearful Over Growth, Profitability

(March 16, 2011) — A Bank of America Merrill Lynch Survey of Fund Managers has found that managers are fearful for corporate profitability and global growth.

“The shift in the March survey is toward stagflation, with lower growth expectations and higher inflation and interest rate expectations causing cash levels to rise,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research, in a statement.

In a sign of waning sentiment over corporate profits, the study showed that a net 32% of respondents said they expect corporate margins to increase over the next year, down from 51% in February. Meanwhile, 31% believe the global economy will strengthen over the next year, down from 51% last month. In the US, the decline in confidence over the strength of the economy was even sharper, declining from a net 52% to a net 21%.

Furthermore, respondents indicated increased concerns about stagflation, with a net 38% anticipating below-trend growth and above-trend inflation, up from 19% in January. “If the oil price reverses, this change in sentiment could prove quite fleeting. There has been no massive sell-off. Investors are in ‘wait-and-see’ mode,” Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research, noted in a statement.

Investors have also increased their cash holdings, with a net 18% overweight in cash, compared to a net 3% underweight in February. Additionally, the survey revealed that investors have reduced their exposure to equities and commodities. “Strikingly, this has not translated into greater enthusiasm for bonds,” the report asserted, with investors underweight in the asset class remaining a net 59%, down only slightly from the previous month.

Despite investor fears over corporate profitability and global growth, the survey showed that they have not altered their sector allocations significantly, with a continued appetite for technology. Regionally, appetite for US equities is on the decline. Fund managers overweight in US equities fell a net 23%, down from a net 34%.

In regards to emerging markets, the study showed that confidence in the sector remains strong. A net 15% of regional fund managers now expect the Chinese economy to weaken in the next year, down from a net 27% in February.

The survey, conducted March 4 to March 10, the day before the colossal earthquake and tsunami hit Japan, included a total of 203 global fund managers overseeing a total of $602 billion.