Firms should pay off debt instead of rewarding shareholders, top investors warn

Investors are urging companies to focus on bolstering their balance sheets, instead of paying out surplus cash to shareholders, amid mounting concern that corporations are taking on too much debt, a closely followed monthly survey of investors around the world has revealed.

The proportion of portfolio managers who want companies to improve their balance sheets hit a four-year high of 24pc in the latest Bank of America Merrill Lynch survey, which polled 175 investors managing $517bn in assets.

It was a remarkable turnaround among the investment community, which cited credit crunch concerns as a reason to reject stock buybacks or dividends in favour of "balance sheet improvement".

Earnings expectations also reached a three-year low, with 66pc of those surveyed anticipating corporate earnings would not improve by more than 10pc in the next 12 months. Worries about corporate payout ratios also plagued investors, with 15pc of those polled saying they were too high.

But despite these concerns, only 7pc said they expect a recession in 2016.

However, the outlook for China worsened. Growth prospects in the region slumped in December. Investors identified a Chinese recession (34pc), followed by geopolitics (19pc) and emerging markets debt crisis (18pc) as the biggest risks.

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Fund managers' exposure to emerging markets fell to near record lows, as a strengthening US dollar and higher bond yields prompted many to cut their positions.

“They perceive the region to be a value trap with a weak earnings outlook,” the bank said.

Amid the pessimism, sentiment towards European stocks remains upbeat, with around 55pc of fund managers worldwide citing Europe as the most preferred region.

A net 58pc now expect the European economy to strengthen over the next 12 months - up 4pc on last month.

Ahead of a widely anticipated US interest rate rise tomorrow, 58pc of portfolio managers also said they expected the Federal Reserve to hike rates three times or more over the next 12 months.

There has been a reduction in risk appetite in the build up to the Federal Reserve policy meeting, with investors piling out of growth stocks, such as technology and healthcare, in favour of defensive plays, such as utilities and insurance.