For the first time in a year, more fund managers want companies to increase capital expenditure than return cash to shareholders.

Nearly half of respondents to Merrill Lynch’s Survey of Fund Managers for November want to see greater capital spending, the highest recorded in the survey.

Just 37% are still looking for further cash returns and only one in 10 believes cash should be used to improve balance sheets.

“Companies are now under pressure from shareholders to stop being so cautious, to stop running themselves for cash and to start running themselves for growth again,” said David Bowers, chief global investment strategist at Merrill Lynch, in a release. “What remains to be seen is whether companies are failing to take advantage of new growth opportunities, or whether investors have got carried away with a prolonged period of cheap credit.”

Rising interest rates, oil price hikes and persistent anxiety about inflation have had no major impact on fund managers’ view of the global economy, which remains comfortably lodged between mid- and late-cycle phases, Merrill Lynch says.

A net 14% of managers now expect the global economy to deteriorate over the next year, versus 24% who took this view a month ago. And a net 19% expect corporate profits to deteriorate during the same period, versus 34% in October.


Meanwhile, Merrill Lynch says risk appetite is showing signs of improvement. Only a net 5% of fund managers describe their risk levels as lower than normal, down from a net 20% who said the same thing a month ago.

Despite this modest pickup in risk appetite, mean cash levels are at 4.3%, up from 3.9% three months ago and most fund managers continue to anticipate a rise in volatility.

Investor sentiment towards U.S. assets brightened slightly in November, suggesting last month’s low point for the sector may prove to be the proverbial darkest hour before dawn. A net 17% of asset allocators now say they are planning to increase their exposure to U.S. equities and, though a net 42% of fund managers still say U.S. equities are the most overvalued asset class in the world, this is the lowest it’s been for almost three years.

Meanwhile, a net 31% of fund managers plan to underweight the region over the next 12 months, down from 42% who took this view just two months ago.

Pharmaceutical stocks remain the most popular sector, according to asset allocators, while utility stocks are currently the least appealing to investors. Thirty-nine per cent of asset allocators say they are overweight pharmaceuticals, while more than half (52%) describe themselves as underweight utilities.

Insurance stocks saw a big improvement on the month. More than a quarter of investors (26%) say they are overweight insurance companies, up from 9% a month ago. Bank stocks are also gaining in popularity with investors. These assets have improved from a 21% underweight to an 11% underweight.

A total of 290 fund managers participated in the global and regional surveys from November 3 to November 10. These institutional investors manage a total of US$945 billion.