Rising risk appetites among institutional investors is leading them to deploy their cash across equity markets, according to the BofA Merrill Lynch survey of fund managers for January.

For the first time since January 2006 the survey shows investors are taking above average risk, relative to their benchmark, Merrill reports, noting that this comes after several months of investors displaying optimism about the economy, but maintaining a more cautious risk and investment profile.

Average cash balances have fallen to 3.4%, the lowest reading since mid 2007, and down from 4.0% in December, the firm reports. At the same time, 52% of asset allocators are overweight equities, up sharply from 37% in December.

Merrill also observes that fewer investors are protecting themselves against a fall in equities, as 55% have no protection against a fall in the next three months, compared with 48% in December. Investors have been moving into cyclical stocks, are positive about profits and are urging management teams to invest in growth rather than repairing balance sheets, it says.

“This survey is one of the more bullish we have seen and suggests that investors buy into the idea that this recovery has legs,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.

“We are, however, seeing early signs that might alert contrarians looking for a selling opportunity – namely low cash allocations and possible complacency against a sell off in stocks,” said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Global Research.

For the first time since mid 2006, capital investment heads the list of investors” priorities – ahead of reducing debt and returning cash to shareholders, it notes. Four out of ten respondents say that capital spending is what they most want to see corporates use their cash for. Improving the balance sheet, which has been investors” priority for the past year and a half, is now in second place.

“The desire to see greater investment in growth reflects how optimism about corporate earnings has pushed higher,” it says, with 63% of global investors expecting corporate earnings to increase by at least 10% over the next 12 months. The outlook for margins is also positive, with 40% of investors predicting that operating margins will improve.

Portfolio managers asset allocation decisions are also changing, and they are showing signs of returning to “laggard” sectors and regions that they have shunned in recent months. Global asset allocators have consolidated positions in technology and energy but they have also increased exposure to banks and consumer discretionary in the past month, Merrill says.

Additionally, from a geographic perspective, Japan is back in favour. The global panel identified Japanese equities as the most undervalued in the world and over the past two months Japanese equities have become more popular than eurozone equities. Japan is the region that 20% of the panel would most like to overweight in the coming year, versus 10% opting for Europe.

A total of 209 fund managers, managing a total of US$539 billion, participated in the global survey from January 8 to 14.

IE