European fund managers appear reluctant to take active positions despite feeling more positive over the continent’s economic recovery, according to the latest Bank of America Merrill Lynch (BofA ML) fund manager survey.
The November edition of the monthly study said European managers were “hugging benchmarks”, with little evidence of major over- or underweight sector allocations.
BofA ML said the sense of caution was reflected in managers’ preferred investment styles. A net 39 per cent expected high quality stocks to outperform, up from 14 per cent in October. This was despite a net 54 per cent suggesting the eurozone economy to strengthen, up from 25 per cent in October.
However, global fund managers reported record positive sentiment towards European stocks, with 58 per cent holding an overweight to eurozone equities.
BofA ML said this was backed by the belief in both dollar strength and euro weakness, due the expectations of diverging monetary policy in the two regions.
Manish Kabra, head of European quantitative strategy at the bank, said: “While European equities are loved by global investors and the European Central Bank (ECB) has created some excitement about growth, sector positioning shows local asset managers are lacking conviction and hugging their benchmarks.”
A third of European managers said long dollar was the most crowded trade, up from 23 per cent in October.
“The takeaway [from global managers] is the most vulnerable tactical trade heading into [the] Decemeber Fed hike is “long dollar”, and associated positioning, i.e. long discretionary, eurozone, banks, Japan, short emerging markets, resources and commodities,” the investment bank’s survey said.
“Eurozone stocks are seen as one of the big winners, in addition to discretionary, banks, and Japan. In the same vein, global fund managers remain short emerging markets and the commodity-bloc,” the research added.
Generally, the proportion of European fund managers who were overweight equities rose 17 percentage points to a net 43 per cent, with cash at the lowest level since July. Japan and the eurozone remain the most favoured equity markets.
Other major shifts in positioning saw the proportion of managers favouring bonds fall by 18 percentage points, with the proportion favouring cash dropping by 15 percentage points. Equities were the largest riser, alongside real estate and tech stocks.
Overall, 61 per cent of fund managers expected high quality stocks to outperform their low quality peers, while 21 per cent believed high yield bonds would outperform investment grade holdings.
