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More respondents said the global economy is in an early-cycle phase rather than a recession Photo: iStock
More respondents said the global economy is in an early-cycle phase rather than a recession Photo: iStock

Fund manager survey shows hopes of earnings revival are running high

Current market momentum is driven by the fear of missing out factor, which has overridden logic, says an expert

An increasing number of global fund managers are becoming optimistic about a revival in corporate earnings. Around 69% of respondents see global profits improving over the next 12 months, showed Bank of America Merrill Lynch’s latest survey of fund managers. This is the highest level since December 2009, said the survey report.

Besides, for the first time since February, more respondents said that the global economy is in an early-cycle phase rather than a recession, showed the survey. Improvement in economic outlook usually trickles down to earnings estimates, according to Goldman Sachs. “Our economists have recently made upward revisions to their economic forecasts and it is likely that analysts’ expectations will follow. This is typically what we see in the early stages of a recovery from a bear market," it said in a report on 7 September.

Risks aplenty
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Risks aplenty

There are also expectations of a faster-than-expected availability of a vaccine for coronavirus. The majority of respondents expect a credible vaccine for covid-19 to be announced by 30 January 2021. That said, global fund managers still see a second wave of coronavirus infections as the biggest tail risk. As such, this optimism about revival in corporate earnings should be taken with a dose of salt. Global equities have priced in a scenario of ultra-accommodative monetary policy for a long period to support economic growth. This has made market participants ignore downside risks.

“Investors have gone ‘all in’ with a disregard for caution," said Lance Roberts, chief investment strategist at US-based Real Investment Advice in his blog dated 15 September. The current market momentum is driven by the fear of missing out factor, which has overridden logic, Roberts said. “Investors are counting on a vaccine to restore the economy to its previous strength fully. While the economy is indeed recovering, along with employment, it will still likely fall well short of pre-pandemic levels stifling future earnings growth and revenues. Investors are paying exceedingly high valuations based on a full earnings recovery, which is unlikely to be the case," said Roberts.

Central bank policy remains extremely supportive of equities, but investors should consider a number of downside risks, said Bob Doll, senior portfolio strategist, Nuveen Asset Management.

“Commodity markets may also show some cracks. Oil prices have sunk recently, following their sharp rebound from the initial pandemic-induced shock and gold and industrial metal prices appear due for a pullback. Additionally, we still think equity prices reflect a more positive corporate earnings backdrop than we think is likely," Doll said in a note to clients on 14 September.

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