As we round the last lap before 2011, it’s a good time to take stock of what the year ahead might hold for investors. There are several cross currents and big regional divergences to consider, and there certainly is no unanimity of opinion on how things might play out. But there are changes in what professional investors are thinking, and since stock prices are set at the margin, any change in the professional investors’ mood is worth noting.
There’s a trove of new info on what money managers are mulling thanks to a new BofA Merrill Lynch survey of some 300 big investors, both in the U.S. and abroad. Their findings confirm what we are seeing in the headlines, that the investor appetite for risk is on the rise. Based on the survey results, the mood turned up back in November, about when the Federal Reserve announced its intention to launch QE2. Since a shift in investor psychology is what the Fed chairman had in mind with this latest blast of stimulus, he should take heart in the latest numbers. Basically, money managers have gone in two short months from fearing a double dip (or something nearly as bad,) to a cyclical bullishness, i.e., believing that the cyclical forces of economic recovery will overpower all that fiscal hand wringing and set companies spending and hiring, profits gushing and stock prices rising.
Of the 302 institutional money managers in the survey, Merrill notes, a net 44% expect global growth to strengthen in 2011 (it was only 15% in October.) They are similarly bullish on the outlook for corporate profits (another big change from just two months ago) and they are also bullish on the U.S. stock market, with a net 16% overweight in stocks versus just 1% two months ago. As this repositioning takes place, and is presumably followed up by individual investors making a similar adjustment, it bodes well for stocks in the first half of 2011. Confirming the pro-cyclical tilt, manager are also shifting heavily into energy stocks.
The survey also reveals that big investors now expect inflation to head north, but 6 out of 10 also expect the Fed will not raise interest rates until 2012. That says to me that it’s the best of both worlds–rather than thinking deflation, which leads people to postpone purchases, the crowd is thinking prices will rise. But the fact is, prices are not rising much at all, so we have a positive spend-it-now tude and no real underlying inflation. The notion that the Fed will not raise interest rates soon enough to contain any inflation threat is also kind of bullish. Remember, this hasn’t happened, it’s just what people think. If you’re a business leader and you’re convinced the Fed will not raise rates in 2012, then you have an open runway before you.
Of course, it’s not all blue sky. The money managers surveyed worry that China’s growth could slow quite dramatically in the first quarter, and among fund managers that specialize in Europe there’s optimism in the face of, well, a bad situation that only seems to be getting worse. As Merrill Lynch summarizes, the big investors are steering clear of European banks but remain “relatively constructive on the macro outlook in the face of the European debt crisis.” Good luck on that. They are, however, expecting the Euro to keep falling.
Among all money managers surveyed, Europe tops the list of worries. The number one anxiety, Merrill reports, is the EU sovereign debt funding problem. Much less of a worry, thought still the second biggest concern, is premature fiscal tightening (I assume that’s not directed at any one government in particular) followed by municipal defaults in the U.S., commodity price inflation and China’s real estate market. ( If you can contemplate each of those risks and still feel bullish, maybe you should consider becoming a money manager. ) On balance, though, the Merrill survey survey numbers suggest 2011 could be a pretty decent year, or at least a decent first half, and that’s not bad.
By the way, this is my final blog post for Time. I’ll soon be joining the staff of Bloomberg Markets magazine (easiest way to find it, just Google it.) where I’ll be writing about Wall Street and the banking industry–two great beats. I’m thrilled about the possibilities but I will also miss working with the talented staff at Time. It’s a great magazine–and now, iPad app–that belongs on every kitchen table. That’s not a sweet goodbye but a call for a better, smarter discourse in America. By the way, the credit for Time’s range and depth goes not just to the staff but also to you, the readers, who probe, challenge and otherwise smarten up our thinking, reporting and editing. Thanks for that.