Fed delivering on firmer growth and higher inflation
Our panel of 287 institutional investors enter the New Year optimistic on growth and bullish on equities. The firm hand of the Fed is evident in inflation expectations rising sharply but with no imminent rate increase expected, investors see few alternatives than to stay with risk assets. The level of equity enthusiasm and relatively low cash levels signal some concern but there is to us little evidence of over-exuberance in the survey. The risk to a bullish consensus is if US growth expectations are de-railed by either weaker data or tighter policy. This suggests time for portfolio protection & diversification rather than out and out selling.
Inflation view at 6-year high
Global economic optimism is back to the highs of Apr-10, helped by monetary policy which is seen as the most expansionary since Jul-04. A net 72% expect higher inflation in the next 12m, the highest in almost 6 years, and yet views on the first Fed rate rise continue to be pushed back well into 2012. Risk appetite is strong (risk composite 46 vs. a long term avg 40) but contained with average cash holdings rising slightly to 3.7% and hedge funds reigning back equity exposure.
Loose money, pro-growth; allocation straightforward
A net 55% of asset allocators are O/W equities, the highest reading since Jul-07. With the lowest bond weighting, net 54% U/W, since Aug-07 and a cash U/W of net 5% investors have little cushion against any growth disappointment.
Signs of life in developed markets
Investors are the most positive on US equities (+27% O/W) since late-08. Japan at +5% O/W is also benefiting from not being Europe which allocators cut to a net 9% U/W, a 6-month low. EM remains the most favoured region (net 43% O/W) but this is sharply down on +56% seen in Nov-10 as profit hopes for GEM continue to fall back. Despite economic growth optimism, views on corporate profit outlook moderated in January with a net 50% expecting improvement vs. 51% in Dec.
Cyclical rotation and (very) selective bank improvement
Investors want to retain a cyclical tilt but are prepared to rotate portfolio exposure: tech (+39%) and industrials (+17%) benefit this month at the expense of materials (cut to net 20% O/W from +28%). Banks had the biggest rise in sector positioning, to a net 21% U/W (from -28% in Dec) but it remains a deeply unloved sector with Japan the only region showing improvement. Tech regained most favoured sector status and alongside energy (+36%) are the two high conviction sector trades.
For the contrarian: short equities, long bonds; short US, long Europe; short tech and energy, long banks and utilities.
Click in chart to enlarge, courtesy of BofA Merrill Lynch.
Ever thought of getting contrarian? Especially, if eating from Fed's hand?