Tuesday, December 14, 2010

Merrill's Global Fund Managers "Inflate-on" ...

This month, in comparison to last month, the key message from BofA Merrill Lynch Global Fund Manager Survey are as follows:
Pro-growth, pro-risk

Our panel of 302 institutional investors remain optimistic on growth and risk assets. But monetary policy stimulus is clearly pushing investors into inflation-plays such as resource stocks in December and away from bonds. The downside risk to consensus is a Q1 dip in Chinese growth; the upside risk is a broadening out in bank-boosting growth upgrades across the G7.

Growth bulls with nagging China doubts
The tone of December’s survey remains pro-growth. A net 44% see stronger global growth (was 15% in Oct) and a net 51% expect corporate profits to improve (was 11% in Oct). Growth optimism is also revealed by more investors saying they want companies to increase capex rather than return cash to shareholders. The fly in the ointment is China growth with a net 12% now seeing weaker growth, a sharp reversal from 16% expecting stronger growth last month.

The Fed has raised inflation expectations
Expectations for ongoing monetary stimulus (6 out of 10 see no Fed hike until 2012) have caused inflation expectations to surge. A net 61% forecast higher inflation, close to a 6-year high. Thus far this is not impacting risk appetite: average cash balances increased only marginally to a still-low 3.6%, hedge funds remained engaged with gearing rising to 1.48x (highest since March-08). Asset allocators increased their bond U/W to 46%, the most pessimistic since April.

US bulls: $ and equities
Investors are the most bullish on the US in 6 months with equity allocation rising to a net 16% OW (from 1%), overhauling Eurozone which fell to 4% UW from 15% OW last month. EM is the consensus long at 50% OW but Japan saw a sharp rise to 13% UW (from -29%) and is now seen as the most U/V region. Investors are USD bulls with a net 36% expecting 12m appreciation (vs. 14% last month).

Material moves as Energy replaces tech as most popular
Sector moves were pro-cyclical, pro inflation and pro-resources with materials reaching its highest OW(+28%) since 2003 and energy now the most popular global sector (36% OW) deposing technology for the first time in 12 months. Greater cyclical exposure was funded by cutting telecoms, utilities and financials.

On the contrary
The trading sell signal triggered by low cash holdings worked briefly last month before being swept up by positive US macro data. Handicapping the risks of US growth, EM inflation and EU peripheral funding against pro-cyclical positioning could see a need for portfolio rebalancing into next year. For contrarians the sells are: EM equities, energy and technology; buys: global financials, utilities, Europe.
Is it not difficult to be contrarian in such a market?

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