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BofA Merrill Lynch Fund Manager Survey finds Investors retreating to U.S. Equities as growth fears rise

Confidence in China and Eurozone Dips

NEW YORK and LONDON,  — Investors have sought refuge in U.S. markets in the week that eurozone states delivered a financial package to allay sovereign debt concerns, according to the BofA Merrill Lynch Survey of Fund Managers for May.

The survey, conducted from May 7th to May 13th, shows how global investors are buying U.S. equities and retaining confidence in the U.S. dollar while the survey’s risk indicator experienced its largest one-month fall since 2003. Average cash balances rose to 4.3 percent of portfolios from 3.5 percent in April, and the proportion of investors overweight global equities slipped sharply to a net 30 percent from a net 52 percent in April.

But the number of respondents overweight U.S. equities ticked upwards in April. A net 66 percent of the panel expects the dollar to appreciate the most of the reserve currencies. The gulf in confidence between U.S. and European corporate profit has reached a seven-year high.

A net 33 percent of respondents believe that the outlook for corporate profits is most favorable in the U.S. while a net 41 percent say that the outlook is least favorable in the eurozone. That spread of 74 percentage points is the widest since July 2003. The number of U.S.-based investors expecting double-digit earnings growth has risen to a net 54 percent from 50 percent in April.

“May’s survey highlights a flight to the U.S., driven by the uncertainty in Europe and underscores a positive U.S. growth outlook,” said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Global Research. “The survey shows that investors have capitulated on Europe, beaten down by sovereign debt concerns and faltering growth expectations,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.

Eurozone and EM behind fall in global confidence

Concerns in both the eurozone and emerging markets have shaken investors’ confidence in global equities and growth prospects for the global economy. The number of investors who believe the global economy will strengthen in the next 12 months fell to a net 42 percent from a net 61 percent in April. Confidence in earnings also slipped. A net 47 percent of the panel says that profits will improve in the next year, down from a net 67 percent in April.

The survey points to deepening negative sentiment towards Europe. A net 46 percent of the panel expects the euro to depreciate, up significantly from a net 23 percent in April. A net 30 percent of investors say that the eurozone is the region they would most like to underweight, the lowest reading recorded in the survey. The figure in April was just a net 13 percent.

The regional survey echoes this pessimism with European investors reducing their expectations of improved growth to the lowest in a year. A net 23 percent expect Europe’s economy to strengthen in the year ahead, down from a net 62 percent in April. Japanese fund managers are more bullish about their macro prospects than their counterparts in all other regions with a net 71 percent expecting the economy to strengthen in the coming year.

Positive sentiment towards emerging market equities has dipped to its lowest since early 2009. The number of respondents overweight global emerging markets (GEM) equities stands at a net 19 percent this month, down from a net 31 percent in April. The proportion of the panel saying that emerging markets have the most favorable outlook for corporate profits is a net 23 percent, compared with a net 34 percent a month ago.

GEM fund managers have turned more bearish on China than any month since February 2009. The regional survey shows that a net 29 percent of GEM investors expect the Chinese economy to weaken in the next 12 months compared with a net 5 percent predicting a stronger economy in April.

90 percent of European investors rule out ECB rate hike this year

With questions over global growth and profit expectations, fund managers are pushing back the date they expect interest rate rises to start. Ninety percent of European investors say that the European Central Bank (ECB) will not raise rates in 2010, up from 62 percent a month ago.

One in four respondents (25 percent) to the global survey expect no rate rise by the U.S. Federal Reserve before April 2011, compared with one in 10 respondents (10 percent) a month ago. Only 39 percent of the panel expects a rate increase in 2010, compared with 56 percent in April. These readings mirror a fall in the number of investors forecasting higher global core inflation a year from now, down to a net 35 percent from a net 46 percent in April.

Survey of Fund Managers

A total of 202 fund managers, managing a total of US$530 billion, participated in the global survey from 7 May to 13 May. A total of 170 managers, managing US$341 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS. Through its international network in more than 50 countries, TNS provides market information services in over 80 countries to national and multi-national organizations. It is ranked as the fourth-largest market information group in the world.

The BofA Merrill Lynch Global Research franchise covers nearly 3,000 stocks globally and ranks in the top tier in many external surveys. Most recently, the group was named 2010 Top Global Broker (second consecutive year), Top Europe Broker, No. 2 U.S. Broker and No. 3 Asia broker by Financial Times/StarMine. In addition, the group was named No. 1 in the 2010 Institutional Investor All-Emerging Europe Research team survey and No. 3 in the 2010 Institutional Investor All-Europe team survey for pan-European coverage. In 2009, the team was named Best Brokerage by Forbes/Zacks; No. 2 in the 2009 Institutional Investor 2009 All-Brazil Research team survey; and No. 3 in the 2009 Institutional Investor 2009 All-America Equity, All-Latin America and All-America Fixed-Income Research team surveys.

About Bank of America

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