Fund manager confidence is high: Time to sell?

Fund manager confidence is high: Time to sell?

The Bank of America (BofA) Merrill Lynch Fund Manager monthly survey reports that investors are the most confident they have been in four years on the outlook for growth.

The survey found a net 72% of the 229 fund managers who participated now expect the world's economy to pick up over the next 12 months - in July this figure was at 52%. Sentiment towards the eurozone has improved.

Around 88% of fund managers anticipate that Europe will strength in the year ahead, twice the level recorded in July. Investors are positioning for gains in the region's equities.

A net 20% of respondents were overweight the market on a 12-month view, the survey's highest reading on this measure in over six years and makes the region investors' top choice on this horizon.

However, Patrick Connolly, certified financial planner at Chase de Vere, warns that when investors and fund managers become too positive it is often a good time to sell and when they become too negative it is a good time to buy: "Stockmarket volatility is brought about by markets rising too much when times are good and sentiment is positive and falling too heavily during more difficult times when sentiment is negative."

He adds: "There is a strong argument for taking a contrarian approach and not following the herd. Those who do this often end up with better performance than those who take the consensus view and jump in when people are bullish and markets are riding high."

Russ Koesterich, chief investment strategist at BlackRock, says: "We would point out that while economic growth and stockmarket returns do not always go hand in hand, to the extent that investors have low expectations for Europe and China, positive surprises in the economic data should help support those markets."

He adds there is at least some evidence that investors are beginning to recognise these improvements and sentiment is starting to shift, at least for Europe.

Koesterich summarises: "For the past month and a half, we have seen strong inflows into equity funds. While the majority of these flows continue to pour into US stock funds, last week was the first time in months that we also saw significant inflows (approximately $2 billion [£1.3 billion]) into European funds.

"On the whole, we do expect to see continued volatility in international markets, but we firmly believe that they also offer solid long-term value."

The survey found an increased overweight in equities to a net 56%. Higher inflation and long-term interest-rate expectations led to an increase in underweight in bonds to 57%. Cash holdings are reduced slightly from July's year-high level at 4.5%.

However, BofA Merrill Lynch reports managers remain concerned over a "hard landing" in China, though this has calmed since July.

Investor feedback shows emerging markets have fallen out of favour. Findings show weak conviction towards global emerging markets, reporting a net 19% underweight in the asset class.

Michael Hartnett, chief investment strategist at BofA Merrill Lynch global research, says: "While global growth expectations have risen very rapidly, the good news is that cash levels remain high. Out-of-favour emerging markets offer some enticing opportunities to deploy these balances."

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