Earnings outlook increases pessimism over equities

Global investors are increasingly pessimistic about the outlook for equities as expectations for corporate profit growth falls to its lowest level in almost two years.

Just a third of money managers surveyed by Bank of America Merrill Lynch believe that company earnings will rise over the next year.

That is 25 percentage points lower than in January, when expectations remained high that tax cuts from Donald Trump and the Republican-controlled Congress would buoy earnings in the US.

The finding from the monthly survey of some 200 investors released on Tuesday suggests that they believe that the double-digit earnings growth US and European companies are on track to record for the second quarter could prove a high water mark.

That downbeat assessment on earnings was accompanied by the percentage of survey respondents saying equity markets are overvalued rising to a record of 46 per cent this month.

The FTSE All World index set a record high earlier in August and, despite a modest pullback last week spurred by tension between the US and North Korea, remains up 12.5 per cent for the year.

“Investors’ expectations of corporate profits have taken an ominous turn this year,’’ said Michael Hartnett, chief investment strategist at BofA. “Further deterioration is likely to cause risk-off trades.”

The poll also offered some signs that the nervousness over the record level of US stocks is already prompting investors to scale back their exposure.

Allocation to US equities fell to a net 22 per cent underweight in August from net 20 per cent underweight in July. ‘’The last time the underweight in US stocks was larger was in January 2008,” analysts at the US bank noted.

Investors judged that going “long the Nasdaq”, which is home to the world’s largest technology companies, is the most crowded trade at the moment.

The failure of the White House and Congress to pass any economic stimulus has left investors more reliant on the upswing in the global economy to justify buying equities.

Investors are maintaining overweight positions in favour of banks, eurozone equities, cash and emerging markets, the survey found, while exposure to the UK, energy, US and bonds were the top underweights among money managers.

Although the pace of profit growth for European companies is expected to moderate, investors ‘’are positive on the growth outlook in the region’’, the survey found.

Fund managers continued to lift the percentage of their portfolios held as cash, reflecting uncertainty over investments in stocks. Cash amounts remained “stubbornly high” in many portfolios, the bank said.

For the second straight month, investors cited the biggest risk to financial markets as a policy mistake by the Federal Reserve or European Central Bank — with 22 per cent of those polled citing that — while 19 per cent pointed to a crash in global bond markets.

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