European growth expectations drop but appetite for stocks still strong, says BoA Merrill

European growth and earnings expectations have dropped to their lowest levels since the European Central Bank’s quantitative easing was announced, according to the Bank of America Merrill Lynch Fund Manager Survey for October

Merrill said European macro expectations have been reset lower, with a net 25% of respondents now expecting the economy to strengthen over the next 12 months, versus 62% in September, while 36% see stronger profits, down from 48%.

It said global growth fatigue, disappointing inflation data and poor German macro are responsible for triggering the ‘correction’ in growth sentiment.

Still, appetite for European stocks remains strong, said BofA, with 54% of global fund managers now ‘overweight’ the region's shares, up from 45% last month. In addition, it said Europe remains the most attractive region on profits and valuations.

Sentiment towards German and auto stocks dropped to 12-month lows, the bank said.

Merill said exposure to emerging markets remained “in the dumps” despite improved sentiment over China.

China is now seen as the greatest “tail risk” by 39% of the panel, down from 54% last month, while pessimism over Chinese equities eased.

As far as the US is concerned, investors expressed growing scepticism that the Federal Reserve will raise rates this year amid fragility in the global economy and earnings. Merrill added that rate hike expectations have been pushed out to the first half of next year or later.

Just under half of investors reckoned the Fed will raise rates in 2015, down from 58% in September.