PA ANALYSIS: Bulls on parade, but beware an earnings shock

The latest BofA Merrill Lynch Fund Manager Survey has found reignited appetite for risk amid expectations of a December Fed rate hike, but are investors being premature?

PA ANALYSIS: Bulls on parade, but beware an earnings shock

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With growth and inflation expectations notably higher after new US payroll data, the research found managers to have cut cash holdings and increased exposure to equities, real estate and alternative investments.

The percentage of asset allocators overweight equities rose significantly by 17 points to a net 43%, while lowering cash overweights to their lowest level since July.

Meanwhile, confidence in the global economy has rebounded, with net expectations of it strengthening in the next 12 months up 22 percentage points from October.

Robert Burdett, co-head of F&C Multi-Manager Solutions at BMO Global Asset Management, is in the “cautiously optimistic” camp on continuing growth from the global economy, but he says he does worry about earnings sustainability in equities.

He explains: “I think people are becoming more open to inflation returning, perhaps next year. Wages are rising, and the share of profits going to labour is going up; productivity and margins are at all-time highs but we know, particularly in the US, that earnings have been massaged by share buybacks, as have dividend payments.

“I still think we have to be careful in equity valuations and returns. We’re still overweight equities, but we’re underweight the US.”

Four-fifths of BofA Merrill Lynch surveyed panelists now expect the Fed to raise rates next month.

With the Fed and other central banks stressing that they remain data dependent, Burdett believes the only reason that rates will not rise is because of an as yet unknown economic surprise.

“It could be weaker jobs data – which is not likely – or some kind of crisis. But there have been two three speeches in the past week that various members of the Fed have strongly hinted a rise will come in December. So, if it doesn’t happen, the first reaction will be disappointment.”

With fresh data today showing rising inflation in the US in October, it seems we may well be past the last hurdle for the Fed’s first hike on 15 December. Still, in this industry it is always wise to keep an open mind on the unexpected…

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