Hopes dim for rising corporate profits, prompting investors to hold cash
Concerns over corporate profitability and the global economic outlook, alongside the Federal Reserve’s imminent cessation of quantitative easing, have combined to sink investor confidence to a two-year low in October, according to the latest Bank of America Merrill Lynch (BofAML) Fund Manager survey.
A net 32 percent of investors surveyed expect the global economy to strengthen over the next 12 months, a decline from about 52 percent in September, BofAML says in a press release. At the same time, expectations for earnings and inflation have fallen, with 77 percent of respondents predicting below-trend growth in the coming year.
The Fed’s intention to end its years-old program of quantitative easing in October has contributed to investor concerns, BofAML says. The proportion of investors who see central bank policy as too stimulating fell to a net 18 percent in October, down from a net 32 percent in September, marking the lowest level since August 2012.
Signs of an economic slowdown in Europe, Japan and China have further fueled fears of losses in equities and a drop in corporate profits. Investors have responded by retreating to investments perceived as carrying a lower risk, with cash balances rising to 4.9 percent of portfolios in October, the study shows. Investors also increasingly shifted to underweight positions in commodities and in sectors such as energy and materials.
‘Cash balances are high, but investors are retreating to benchmark positions rather than staging an exodus from markets,’ says Michael Hartnett, chief investment strategist at BofAML Global Research, in the press release.
The European outlook has dimmed more than other regions, with only a net 16 percent of investors predicting the regional economy will strengthen over the next 12 months, a sharp decline from a net 45 percent in September. A net 4 percent of fund managers say they are overweighting Europe now, compared with a net 14 percent last month.
