Any further economic deterioration in the Euro zone would enhance the vulnerability of emerging market stocks and commodities, said a Bank of America Merrill Lynch fund manager survey of September.
It says that investors were factoring in a banking crisis focussed on Europe and not a global economic crisis. The BofA survey said risk appetite seemed to be at rock-bottom giving out a “buy” signal.
Consensus global growth estimates have fallen from a negative 13 per cent to a negative 17 per cent though only a third of all respondents thought it would spark a recession. Outlook for corporate profits, however, was the hardest hit from +11 per cent in July to a negative 44 per cent in September.
On the policy front two thirds of those surveyed said that the Fed would not hike rates until 2013 and any decline in the S&P 500 to below the 1100 levels would prompt a QE3. However, EU's sovereign debt crisis remained the biggest concern for two thirds of the respondents.
BofA asked its clients to be overweight on cash and be underweight on equity. Hedge funds have also cut equities exposure to the lowest level in 15 months. Political gridlock, US politics, severe Chinese economic slowdown, global loss of confidence in financial assets and central banks, break up of the euro were the main challenges for the global economy to contend with in the immediate future, said BofA.