Fund managers and company management teams became more bullish during January as the outlook for corporate profitability strengthens ahead of Donald Trump’s inauguration, according to new survey findings.
The Bank of America Merrill Lynch monthly survey of fund managers revealed a more bullish outlook for the world economy, with expectations of global growth now at two-year highs as a net 62 per cent now expect growth. It has also been accompanied by an increase in the expectations of higher corporate earnings.
Michael Hartnett, chief investment strategist at BofA ML, said: “Ahead of the US presidential inauguration, investors are positioned for stronger growth and inflation, but are not willing to turn fully bullish with China-related risks on the horizon.”
It further revealed that allocations to eurozone equities by fund managers had risen sharply in January.
Managers moved from a net 1 per cent underweight to the sector in December to a net 17 per cent overweight position in January.
Manish Kabra, European equity quantitative strategist at Bank of America Merrill Lynch, said: “Fund managers have returned to Europe amid improvement in the macro outlook, but UK remains the most underweighted region.”
Performance of MSCI EMU vs MSCI UK over 1yr
Source: FE Analytics
As well as eurozone equities, the survey revealed that fund managers were broadly buying technology sector, equities more generally and real estate investment trusts. Sold sectors included industrial stocks, emerging market equities and commodities.
Yet, despite managers turning more bullish than previously, funds have increased allocations to safe-haven cash, which rose to 5.1 per cent in January from 4.8 per cent above the 10-year average of 4.5 per cent.
The BofA ML findings come as Fidelity International also revealed a more bullish stance on corporate earnings from analysts ahead of the inauguration of president-elect Donald Trump.
The populist celebrity-turned-politician is seen as a positive development for corporate balance sheets, having suggested a number of measures aimed at reducing the tax burden on US companies.
A survey of 146 Fidelity equity and fixed income analysts covering around 17,000 companies revealed more optimism among corporates.
Almost three-quarters of those with a US focus claimed companies they cover believed Trump’s victory would be positive.
Furthermore, 39 per cent with a European focus though the election would be positive for companies in the region.
Two-thirds of analysts covering Asia did not expect any impact to companies on their patch, while a similar number covering Middle East, Africa and Latin America believed it would be negative.
Performance of S&P 500 vs MSCI AC World since Trump victory
Source: FE Analytics
Despite concerns over the impact of Brexit on corporate earnings, no tangible effects have yet been seen while upcoming European elections are also thought to have little overall impact on corporate earnings over the coming months.
Michael Sayers, director of research at Fidelity International, said: “Our survey shows why it’s so important not to get carried away by sentiment with our analysts’ finding that Trump’s presidency and the new mix of policies is actually boosting corporate sentiment.
“The survey did uncover concern about growing protectionist policies across the globe, including in the US. US analysts warn of the risks to component imports and international supply chains from tariffs, reduced tax deductibility, new rules on imports and disincentives to outsource to India or elsewhere. populist
“However, encouragingly, none of these political risks are seen as strong enough to offset upbeat cyclical forces that are evident in all regions and sectors. As a result, our analysts think core corporate indicators are improving in all sectors and all regions, and are more positive about the outlook for their companies.”
Fund managers also remain wary of risks, with the BofA ML survey revealing the biggest tail risks were also likely to stem to a Trump presidency. Indeed, trade war/protectionism was the biggest risk highlighted by 29 per cent of respondents, followed by US policy error, chosen by 24 per cent.
A more fractious relationship with China could also present a bigger risk for markets with 15 per cent highlighting a China FX devaluation as the biggest tail risk.