U.S. stocks were the most favored by money managers in May as the outlook for growth in the euro region and its currency deteriorated amid a spiraling sovereign debt crisis, a BofA Merrill Lynch Global Research report showed.
Twenty-two percent of survey respondents, who together manage about $530 billion, said they were “overweight” U.S. equities last month, the highest level since 2008. That compares with 34% who said they were “underweight” Europe, almost double the previous month.
“Investors are running away from a potential growth shock,” Gary Baker, head of European equity strategy at BofA Merrill Lynch, said a press briefing in London Tuesday . “This has led to a retreat back to the U.S. after fairly violent price moves.”
The MSCI World index has dropped 9.7% from this year’s high on April 15 amid concern measures to curb levels of European government debt will derail the global economic recovery.
The gauge last week pared some losses after policymakers in Europe unveiled an unprecedented loan package worth almost $1 trillion to contain the crisis that started in Greece and stem the weakness in the region’s currency.
Even so, 46% of respondents expect the euro to weaken, double the number in April. Asset allocators also slashed their overall holdings in equities in May to mid-2009 levels, increased cash levels and scaled back their outlook for growth and profit.
“In times of great stress there is always a knee-jerk reaction by investors,” said Mr. Baker. “We are getting very close to a clear buy signal but we are not there quite yet.”
Thirty percent of investors said there were “overweight” stocks in May compared to 52% the previous month, while average cash levels jumped to 4.3% from 3.5%.
The number of investors who believe the global economy will strengthen in the next 12 months dropped to 42% from 61%, while confidence in earnings also deteriorated. Forty- seven percent said profits will rise next year, compared to 67% in April.
Investors also scaled back their holdings in emerging markets amid concern China will step up measures to curb economic growth. The number of respondents overweight developing markets dropped to 19% in May, down from 31%.
The Merrill Lynch survey of 202 fund managers was conducted from May 7-13. As of January 2009 Merrill Lynch changed the format of its survey and no longer publishes full historical data.