Fund Managers Foresee Inflation; Bullish On Equities

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Bullish stance for equities

According to the Bank of America Merrill Lynch Fund Manager Survey issued in July, global investors have more bullish outlooks for the second half of 2014. A majority of fund managers, 61%, are overweight equities. This is the highest reading reported since early 2011 and the second strongest percentage observed since the survey started. Some managers, 21%, believe that the stock market is overvalued. This is the highest percentage reported since 2000. Geopolitical risks stand out as the greatest threat to financial markets, according to the survey.

Global fund managers cite increased inflation concerns for their more aggressive stance. Most fund managers, 71%, expect the global core CPI to gain in the next 12 months. Last month, only 58% of fund managers had that expectation. Allocations to commodities, an asset class that can gain as inflation rises, have increased to their strongest level in a year. Most managers foresee stronger global economic growth for the next year. Michael Hartnett, chief investment strategist at BofA Merrill Lynch, notes that higher economic growth may bring higher interest rates and volatility to stock markets.

Less interest in European equities

More fund managers see improvement in global GDP driving improved economic conditions in Europe. Previously the panel saw a revamped stimulus program as the main catalyst for growth. Survey respondents also opine that quantitative easing by the European Central Bank will likely be delayed. Only 12% see quantitative easing starting this quarter while 25% foresee measures starting in 2015. Fund managers have lost their conviction on European equities’ prospects. Only 10% of respondents favor an overweight position in European stocks. Among regional markets, panelists lost the most interest in German stocks. Only 12% will overweight this market, a drop of 19% relative to last month. Appetite for investment in peripheral Europe, including Spain and Italy, has dropped as well.


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