Any disappointing earnings announcements to be ‘punished’ amid rising optimism
Investors increasingly want companies to boost investments as global optimism rises, and most call for higher capital expenditures, according to the latest Bank of America Merrill Lynch (BofAML) fund manager survey.
A net 67 percent of investors say they believe companies are underinvesting in the current economic climate, the highest reading in the history of the survey. More than half (58 percent) say companies should devote excess cash to capital expenditures while only 11 percent call for cash preservation.
At the same time, investors are increasingly optimistic about corporate profits in 2014, with a net 48 percent forecasting an improvement, up from a net 41 percent in December. A net 55 percent of investors now say they are overweight equities, in sharp contrast to July 2012, when a net 4 percent were underweight equities.
‘Managers are positioned for a strong profits recovery in Europe, and the upcoming earnings season is key to maintaining this stance,’ says John Bilton, European investment strategist for BofAML, in a press statement. ‘Given the high sentiment, any earnings disappointment will likely be punished by investors.’
The US and Japan are the favored investment options, with a net 29 percent saying companies in those two countries are likely to lead the rise in profits. A net 8 percent predict improved corporate profits in Europe.
The percentage of investors who believe the global economy will strengthen in 2014 has risen to a net 75 percent in January from a net 71 percent in December, according to the survey. As a result, risk appetite has also risen, with a net 4 percent now saying they have increased the level of risky assets in their portfolios.
The overall positive message from the BofAML survey backs up a rash of other surveys and indicators that show investors are starting the year on a much more positive note. The ZEW indicator of economic optimism for the German economy has held steady at near a seven-year high in January, and the latest Corbin Perception study shows 86 percent of investors believe earnings announcements in the upcoming proxy season will meet or beat expectations. A Northern Trust survey released last week shows 69 percent of US investors believe corporate profits will rise in the first quarter of 2014.
