(March 20, 2013) — Investors have made their largest U-turn back towards the United States dollar in the last decade, a monthly survey has found.
A net 72% of respondents to the monthly Bank of America Merrill Lynch survey said they were bullish on the US currency. There was a 30 percentage point change over one month in the number of respondents expecting the dollar to appreciate over the next 12 months.
US equities were also in favour with the group. A net 5% identified the US as the regional market they most wished to overweight, compared to January’s net 19% who went underweight on the region. Additionally, respondents said the US offered the best outlook of any region for corporate profits by far.
“Relative US economic outperformance on the back of the housing market’s on-going improvement and the energy independence story will lead a secular uptrend in the dollar,” Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, said. “US equities’ leadership in the ‘Great Rotation’ suggests developed market equities are the likeliest winner in this scenario.”
In another note issued by the bank this week, Harnett’s team cited the strength of the dollar, mentioning the concerns the bank’s analysts had.
The note said: “Without a doubt the biggest worry to investor positioning right now would be a reversal in the strong US housing and consumer story. Happily the latest US retail sales data allay such fears, and the leadership of the US in The Great Rotation remains on-going. This is best seen by the decisive end to the post-Bear Stearns, deflationary relationship of strong dollar and higher volatility.”
This break between a strong dollar and higher volatility began in the middle of last year after starting over four years earlier. Now the two measurements can be seen to be entirely separate on charts shown by the bank.
The note added that any wobble in the dollar’s progress would create an opportunity for emerging markets to gain some support, as they were being shunned by many investors.
The monthly survey bore out this sentiment, with investors turning their backs on China and other emerging markets, citing a hard landing in the Asian powerhouse. Only a net 14% of investors now expect the Chinese economy to be stronger in a year’s time. This represents one of the sharpest falls in this reading in the survey’s history.
The survey was taken before the recent economic troubles in Cyprus came to the fore.