Feature: Big Investors Become Bullish, Again

It has taken quite a while, but the equity bulls are back and starting to bellow.

They've been gathering strength now for a couple of months - February saw them start to sound very upbeat.

It is not the first time they have proclaimed rebound for the markets, having done it in 2010 and 2011, only to founder on the rocks of the dysfunctional eurozone.

But this time is different (I know they always say that), the eurozone's woes has been fixed for the time being, we are ignoring those fears over China, and the US economy is rebounding.

The March survey of big investors from Bank of America/Merrill Lynch, the noise from the bulls has become a roar as growth expectations improve sharply.

This is showing up in more interest in shares, lower involvement with cash, more enthusiasm for the US (and Japan) and less for China and other emerging markets.

With the return of this bullishness, it's no wonder US markets, and some others, are facing the best first quarter performance since 1998.

The developing boom rolls on with the net percentage of asset managers overweight cash down to just 6% in March, from nearly 40% in October.

On the other hand, the net percentage of fund managers overweight equities jumped to 33%, from 26% last month.

Overall, there's a feeling that the era of cheap money is on the wane, hence the rise in bond yields in the US, Australia, Europe and the UK in the past fortnight.

And while oil remains well above $US100 a barrel and looking to rise, gold and sliver have lost their oomph and are down sharply in the past fortnight as well.

The bottom line for more and more investors is that the chances of a rate rise happening in the US sooner than 2014 (as the US Federal Reserve currently sees it) are rising. Accordingly, global and regional fund managers believe the chances of further quantitative easing in the US and Europe have fallen sharply.

(We have seen a similar point of view emerge at the Reserve Bank in Australia about future rate cuts, and in the way the credit markets have stopped pricing in any more rate cuts for the next few months).

More and more managers are becoming confident about the outlook for Europe, a sign that the fears of late 2011 and early this year have been pushed aside by the rapidly evolving bullishness.

The latest Bank of American Merrill Lynch fund manager survey revealed that a net 28% of investors expected the world economy to strengthen over the coming 12 months, up from a net 11% in February.

But this rising tide of bullish sentiment on growth was not shared equally across the globe.

Although growth expectations in the US, Europe and Japan improved, the survey revealed a more negative view of Chinese growth.

The net percentage of investors predicting a weaker Chinese economy rose to 9% from 2%.

News though of a further slowing in Chinese manufacturing so far this month in the latest survey from HSBC, might add to the China slump fears and push shares lower by the end of the quarter next Friday

In the US there has been a sea change in belief about easy money.

Almost half of all fund managers surveyed said they did not expect any more quantitative easing from the Federal Reserve, compared with 36% last month.

It's a similar view for the European Central Bank with 43% of those surveyed seeing no further quantitative easing in the eurozone, up from just under a quarter in February.

The ECB of course carried out two significant bouts of quasi-easing by lending swell over 900 billion in three year loans to banks across Europe and the UK

"Such has been the success of central bank policy, you now have many investors thinking quantitative easing is no longer required," said Gary Baker, head of European equity strategy at Bank of America Merrill Lynch Global Research.

The March figures reveal that a net 28% of investors expect the world economy to strengthen in the coming 12 months, up from 11% in February.

This was partially boosted by confidence in the eurozone, where those predicting a stronger economy have increased by 15 percentage points to match those forecasting a weaker one.

"We are witnessing a rehabilitation of European growth prospects, boosted by a sharp fall in EU sovereign concerns," said Gary Baker, head of European equities strategy at Bank of America Merrill Lynch Global Research.

The number of global investors naming EU sovereign debt as their number one 'tail risk' has dropped from 59% to 38% in the last month.

And investor sentiment towards corporate earnings in the eurozone has also dramatically improved, with only a net 7% expecting earnings to get worse in the coming 12 months, down sharply from the 39% in February and 84% in December.

Not surprising, with the yen falling against the US dollar and the Tokyo stockmaket up almost 20% in the past five weeks, Japanese fund managers are the most bullish, with an overwhelming net 91% expecting the economy to strengthen.

Expectations are also higher for an improved for the US economy, with a net 29% of US investors now predicting that it will strengthen this year.

Banks and financial services companies are returning to the investment spotlight (helped by the ECB funding and the positive results of the latest US stress tests on the 19 biggest financial groups).

Investors are starting to shift their allocations towards equities.

Among global asset allocators, a net 14% are underweight in banks this month, down 11 percentage points, while US investors are now collectively neutral on banks, wiping out the previous US underweight position.

The underweight position in European banks has fallen to a net 7% of investors from 50% in January, a significant improvement.

While confidence is rising in the developed economies, doubts are growing about the emerging markets, led of course by China.

The proportion of investors expecting contraction in China's economy has grown by seven percentage points to a net 9%.

Sentiment is also declining in the wider Asia-Pacific region (excluding Japan), where a net 41% of respondents are expecting the regional economy to contract in the year ahead.

That is impacting the performance of the Australian stockmarket in particular, although we are also a major raw materials supplier to Japan (iron ore, coal, LNG, oil and grains)

The survey, which questioned 278 fund managers with a total of $US 796 billion assets under management, also revealed increasingly optimistic expectations for corporate earnings.

More fund managers now expect corporate profits to improve rather than deteriorate for the first time since May last year, boosting hopes that earnings momentum will pick up throughout 2012.

Inflation expectations hit their highest level since July 2011, with a net 13% per cent of investors expecting inflation to be higher in 12 months' time.

This marks a sharp reversal from February, when a net 16% of fund managers said that inflation would fall (We can blame the rise in oil and petrol prices for that switch).

Despite the higher confidence about Europe's outlook, more than half of fund managers polled by Bank of America-Merrill Lynch expect at least one existing euro-zone member to announce its intention to leave the currency union.

Some 54% of respondents polled thought a country would exit the euro zone, compared with 40% who thought the currency union would remain intact and 6% who didn't know.

However, half of those who thought a euro exit would occur believed it would not happen this year. Just over a quarter thought it would happen in the third quarter of 2012.

And yet the survey also revealed that investors have become less worried about European Union sovereign debt funding.

While this still remained the biggest global external risk--or "tail risk"--only 38% named it as their number one tail risk in March, sharply down from 59% in February.