Investors appear to have put the volatile first quarter behind them and are returning to equities.
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Bank of America Merrill Lynch’s June Fund Manager Survey showed investors’ allocation to U.S. equities climbed to net 1% overweight. This is the first time investors have gone overweight in 15 months.
“Investors have their eyes on the US this month,” said Michael Hartnett, chief investment strategist, “with a record high favorable outlook for profits and a return to US equity allocation. Decoupling is back in vogue.”
Sixty-four percent of the fund managers that responded to the survey think the U.S. has the most favorable outlook for profits, a 17-year high; all other regions have net negative profit outlooks. Investors are putting their money into equities, with allocation to stocks hitting an eight-year high, rising to net 7% overweight.
While the managers are optimistic about the outlook for U.S. companies, they are concerned about their debt holdings, with a record 42% saying companies are overleveraged. The last peak was back in 2008 when 32% feared companies were overleveraged.
When it comes to what the managers are buying, investors are starting to turn to defensive sectors and U.S. equities and selling cyclical plays such as banks, emerging markets and eurozone equities.
The managers were fairly cautious on global growth forecasts, with just net 1% of investors believing the global economy will strengthen over the next 12 months. This is the lowest reading since February 2016.
The major risks to the markets include a trade war (with 31% of the survey participants citing it as a risk), a Federal Reserve or European Central Bank policy mistake (26%) and a euro/emerging markets debt crisis (23%).