Institutional investors are plowing most of their renewed appetite for risk into global emerging market equities, according to the latest edition of the BofA Merrill Lynch Survey of Fund Managers.

The firm reports that the level of risk that investors took in their portfolios in September rose more sharply than in any month since April 2009. Hedge funds continued to add to their net equity exposure, and the proportion of asset allocators overweight equities nearly tripled to a net 27% from a net 10% in September, the firm says. The proportion of portfolio managers overweight cash fell to a net 6% from a net 18%.

The vast majority of this movement into equities was into global emerging markets (GEM), Merrill says. It reports that a net 49% of asset allocators are overweight GEM, up 17 percentage points from the previous month. In particular, portfolio managers are more optimistic about China’s growth over the coming year, it says.

“While improved risk appetite is to be welcomed, one proviso is just how narrow the investor focus on GEM is at this point,” said Michael Hartnett, chief global equities strategist at BofA Merrill Lynch Global Research.

In addition to emerging markets, investor demand for commodity exposure is also on the rise, the firm says, with a net 17% overweight in October, compared with a net 4% the previous month. And, it notes that asset allocators shifted from their defensive sector positions of September back towards cyclical and growth stocks.

Investors are also more bullish about the outlook for corporate profits and want to see CFOs take a more aggressive stance by investing more in their businesses, returning surplus cash to shareholders and adding debt, it says.

However, the survey also shows a real lack of conviction towards U.S. or eurozone equities, it says, suggesting that this reflects uncertainty over the direction of the dollar and the euro. A net 45% of fund managers now regard the U.S. dollar as undervalued (up from 18% last month) and the same proportion see the euro as overvalued. But only a net 12% of the panel expects the U.S. dollar to gain against a basket of key currencies over the next 12 months.

Gold is viewed as overvalued by a net 24% of the panel, double the level of two months ago.

A total of 194 fund managers, managing a total of US$492 billion, participated in the global survey from October 8 to 14.

IE