Growth and inflation expectations surge, says survey

Global fund managers have dramatically upped their growth and inflation forecasts in the wake of a second round of quantitative easing (QE2), according to November’s Bank of America (BofA) Merrill Lynch fund manager survey.

The net percentage of global managers forecasting stronger global growth over the next 12 months has jumped from 15% in October to 35% in November. Meanwhile the proportion of managers expecting inflation to rise over the next year surged from 27% to 48%.

Gary Baker, the head of European equities strategy at BofA Merrill Lynch Global Research, says this month’s survey is “a charter of the benefits of QE”.

“This month’s survey shows global managers to be at their most pro-bullish, pro-risk and pro-growth levels that we have seen all year,” he says. “The levels of optimism are back to those levels last seen in April last year.”

As a result in November a net 41% of the fund managers surveyed were overweight in equities, up from 27% in October, while exposure to bonds was reduced from a net 24% underweight in October to a net 36% in November. (article continues below)

Baker says: “Following QE2, we have witnessed a capitulation into risk assets to a degree that history suggests should prompt a concern.”

Indeed Baker points out that cash levels in November fell to 3.5%, down from 3.8% last month.

“Cash levels are at dangerously low levels,” says Baker. Indeed Merrill Lynch data that stretches back to 2004 shows that five out of the six times cash levels have hit 3.5% or lower, there is a negative reaction in equity markets in the next four weeks.

The survey also revealed that the perception among managers that monetary policy is “too easy” rose to its highest level, 45%, since 2004. In this environment just one in five managers predict the Federal Reserve to raise interest rates before the fourth quarter next year.

In terms of regions, Baker notes that despite sovereign debt concerns the eurozone saw the biggest positive change of any region in November. Asset allocators increased their position from a net 3% overweight in October to a net 15% overweight in November, which is the highest level since 2004.

Britain was the only region to see a fall in asset allocation in November, with investors increasing their underweight stance to 6%, up from a 15% underweight last month.

A total of 218 managers running a total of $634 billion (£395 billion) of assets participated in the survey. It was conducted with TNS, a market research company, from November 5-11.