Meanwhile, investors have sharply pulled back from the US – which has witnessed a strong rally in the years since the financial crisis – after concerns intensified that the Federal Reserve is on the brink of lifting interest rates from their current lows.
The latest Bank of America Merrill Lynch (BofA ML) Fund Manager Survey found that sentiment towards Europe has rocketed this month while global investors have moved from an overweight in the US to an underweight.
Performance of indices over 6yrs
Source: FE Analytics
The research covers 168 asset allocators with combined funds under management of $565bn and was carried out between 6 and 12 March, offering a timely insight into how managers are positioning their portfolios.
A net 19 per cent of fund managers are now underweight US equities, which is in stark contrast to the 6 per cent overweight seen in February. March’s underweight is the largest that the US witnessed since January 2008.
In addition, the pullback from the US seems set to continue in the months ahead as a net 35 per cent of fund managers said the US is the region they would most like to underweight during the coming 12 months.
This is the most bearish reading recorded in almost 10 years.
Managers have also started to bring forward the expected date of the Fed’s first interest rate rise, rather than keep pushing it back. The proportion thinking a rise will happen in the second quarter has moved from 28 per cent to 34 per cent, while the proportion forecasting a third-quarter increase has declined.
The Federal Reserve started its two-day monetary policy meeting yesterday and is expected to publish its statement later today. Most commentators think the Federal Open Market Committee will remove a promise to be “patient” about its first hike, signalling that a rate rise is imminent and could take place in June.
The BofA ML survey also shows that a net 2 per cent of investors now view the dollar as being overvalued – the first overvalued reading for the asset since 2009.
However, not everyone shares this viewpoint. Robin Geffen (pictured) has positioned his Neptune Global Equity and Neptune Global Alpha funds to benefit from a continued rise in the dollar, citing the numerous headwinds present outside the US.
“Behind this dollar bull market is what I call the ‘Great Policy Divergence’. The US Federal Reserve appears now to be close to tightening monetary policy, while most major central banks around the world, including the European Central Bank, the Bank of Japan, the Reserve Bank of India and the People’s Bank of China, are loosening. This raises the relative expected return on dollar assets and the demand for the dollar,” he explained.
“How far does the dollar bull market have left to run? Well, the Great Policy Divergence reflects the following irony about the world. The US was the source of the great global economic crisis that has shaped our lives during the past decade and, while the US economy has now emerged from the crisis with a clean bill of health, in many places around the world it shapes life still.”
“The euro crisis lingers on; China’s debt bubble, a result of its Keynesian response to the global crisis, lingers on; the latest leg of the UK’s housing bubble, a result of the Bank of England’s response to the global crisis, lingers on. Each of these current malaises were precipitated one way or another by the US sub-prime crisis – yet the US itself is today as fit as a fiddle.”
“I don’t see these problems in the rest of the world going away soon, so the dollar looks like the king for the foreseeable future.”
Fund managers polled in the survey said geo-political crisis was the biggest tail risk on their radar, although the number worried about this has fallen over the past month.
A greater number fear Chinese debt defaults and an emerging market crisis, but the largest jump in worries came over the risk of equity market bubbles – which is at its highest level since May 2000.
Fund managers’ biggest tail risks in March 2015
Source: Bank of America Merrill Lynch
One area where confidence is booming, however, is European equities. A net 60 per cent of global asset allocators are overweight in eurozone stocks, moving up from 55 per cent last month and reaching a new record high.
Manish Kabra, European equity and quantitative strategist at BofA ML, said: “Bullishness towards European stocks has reached uncharted territory. Demand for financials highlights confidence in domestic growth, while belief in European exporters is building on gains seen last month.”
A net 63 per cent of investors cite Europe as the region they want to be overweight on across a 12-month view, which is the highest level seen since the question was introduced to the survey in 2001.
Funds focusing on Europe had a net 25 per cent underweight to the region’s banks last month but this has reversed to a net 22 per cent overweight, demonstrating the surge in confidence over the continent’s chances of economic recovery.
Sentiment in Europe has been bolstered in recent months after ECB president Mario Draghi unveiled a €1.1trn quantitative easing programme designed to combat deflation and spark economic growth in the eurozone.
Anna Haugaard, fund analyst at Brewin Dolphin, said: “The widely held positive view on the US and deep pessimism about the state of Europe appears to be reversing.”
“Investors came out of US equities last week and into European equities and bond markets for the ninth straight week. Finally the market appears to be taking notice of Europe’s positive economic surprises and the ECB’s commitment to its quantitative easing programme.”