The world economy is in its best shape in 18 months as China’s prospects improve and the U.S. looks likely to avoid the so-called fiscal cliff, according to the latest Bloomberg Global Poll of investors.
Two-thirds of the 862 surveyed described the global economy as either stable or improving. That’s up from just over half who said that in September and is the most since May 2011.
The U.S. came out on top for the eighth straight quarter when investors were asked which markets will offer the best opportunities over the next year. China ranked second, reversing a decline to fourth in the September poll of investors, analysts and traders who are Bloomberg subscribers. The European Union, beset by a debt crisis, was seen offering the worst returns.
“The global economy is improving, recovering and healing, thanks to the U.S. and the emerging markets,” said Andrea Guzzi, a poll respondent and vice president of IST Investmentstiftung fuer Personalvorsorge, which manages money for Swiss pension funds. “More people are becoming wealthy, less and less are poor.”
Stocks were seen as the asset of choice, with more than one in three of those surveyed on Nov. 27 forecasting equities would have the best returns in the coming year. Real estate came in second: Just less than one in five investors singled it out favorably, the best showing since the quarterly poll began in July 2009. Bonds were seen as offering the worst returns.
The Federal Reserve is expected to provide continued support to the bond market after its Operation Twist program ends next month, according to the poll. About three in four said the U.S. central bank will begin outright purchases of Treasury securities after its plan for swapping short-dated securities for longer-dated ones expires.
A plurality -- two in five -- said the Fed also will continue buying mortgage-backed securities into 2014, a strategy dubbed QE3 by investors, shorthand for the third round of quantitative easing by the central bank.
“The Fed is being very clear about monetary policy,” Gala Prada, a poll respondent and portfolio and asset manager for Fiatc Mutua de Seguros y Reaseguros, a Barcelona-based insurance company, said in an e-mail. “If the economy doesn’t improve, there will be a QE4 or more asset purchases.”
The growing optimism among investors about the world economy was not reflected in their views of the prospects for the financial services industry. About seven in ten said they expect large banks to reduce payrolls further in the next year after cutting at least 188,000 jobs over the last two years. A majority blame regulatory changes for the reductions.
Banking authorities have tightened rules and raised capital standards on banks after the worst financial crisis since the Great Depression forced governments to spend billions of dollars to rescue ailing financial institutions.
“Many countries have oversized banking sectors, which need to go back to more sustainable sizes,” Guzzi said in an e-mail from Zurich.
The optimism on the world economy is based in part on an expectation that the U.S. will avert $607 billion in automatic spending cuts and tax increases scheduled for Jan. 1. Three out of four surveyed anticipate that President Barack Obama and Congressional leaders will reach a short-term agreement to avoid the fiscal cliff.
The 34-nation Organization for Economic Cooperation and Development in Paris warned this week that the world economy would tip into recession if the U.S. failed to act.
Close to half of investors said they plan to increase their exposure to equities over the next six months, up from less than two in five in September.
Respondents are most bullish about U.S. equities. A majority forecast that the Standard & Poor’s 500 Index will rise during that time frame. S&P 500 futures rose 0.6 percent to 1,415.8 at 7:08 a.m. in New York amid optimism President Barack Obama will reach an agreement with Congress over a new budget. The stock gauge has increased 12 percent this year.
“U.S. companies have better profit potential, balance sheets and access to capital,” Christian Thwaites, a poll respondent and president and chief executive officer in New York of Sentinel Investment, which manages more than $27 billion, said in an e-mail.
U.S. property prices also are heading up, investors said. More than three in five forecast that housing values would be higher six months from now. A minority responded that way in the last poll in September.
Home prices rose in the year ended in September by the most since July 2010, climbing by 3 percent, according to the S&P/Case-Shiller index of property values in 20 cities.
The housing market has been supported by the Fed, which has said it expects to hold overnight interbank rates near zero until at least the middle of 2015.
Forty-five percent of investors said the U.S. central bank would enhance understanding of its policies and help the economy if it tied its pledge to keep rates low to specific thresholds for unemployment and inflation. One in four said such a move would be confusing if such a goal-oriented commitment replaced the Fed’s current calendar-specific rate promise.
The Fed itself is split over the issue. Fed Vice Chairman Janet Yellen and Chicago Fed President Charles Evans have supported a switch, while Philadelphia’s Charles Plosser and the Dallas Fed’s Richard Fisher have voiced doubts.
Commodities lost some favor in the latest survey. Only 12 percent said it will be the best-performing asset class over the next year, down from 18 percent in September.
Investors remain downbeat on bonds. Forty-eight percent intend to reduce their holdings of U.S. Treasury bonds over the next six months, the most since the poll began asking that question in May 2011. By a slim margin -- 50 to 45 percent -- respondents viewed Treasuries as a safer investment than AAA-rated U.S. corporate bonds, such as those of Microsoft Corp. and Exxon Mobil Corp.
More than two of five investors expect European Union markets to offer the worst opportunities over the next year. That was the most negative reading in the poll, followed by Japan, with 23 percent, and the Middle East, with 17 percent, up from 7 percent in September.
Forty percent of respondents are less likely to put money into Egypt since President Mohamed Mursi took over in July -- 10 times the amount who said they are more likely to invest.
Protesters and police clashed in Cairo on Nov. 28 as Egypt’s opposition resolved to stand firm against Mursi and the Muslim Brotherhood in a showdown over his self-decreed powers.
Half of those surveyed said they don’t expect a military strike against Iran’s nuclear program in 2013.
Israeli Prime Minister Benjamin Netanyahu has repeatedly warned that time is running out to prevent an Iranian nuclear bomb, which he expects to be aimed at Israel.
Iranian President Mahmoud Ahmadinejad, who regularly denounces Israel as an illegitimate regime that should “disappear,” says his country’s nuclear program is for peaceful purposes.
The poll of Bloomberg customers was conducted by Selzer & Co., a Des Moines, Iowa-based company. The survey has a margin of error of plus or minus 3.3 percentage points.