Fund managers show renewed confidence in global equities: survey

It reports that allocations towards equities have made the largest one-month leap since the beginning of 2011. Now, a net 26% of asset allocators are overweight equities, up from 12% last month. The appetite for cyclical stocks, including the industrials and materials sectors, has picked up, while allocations towards defensive stocks, including pharmaceuticals and telecoms, have fallen, it says.

At the same time, investors have also reduced their cash levels, it says. A net 13% of asset allocators are now overweight cash, down from a net 27% in January.

Merrill reports that a majority of the panel now sees the world economy improving. A net 11% says the economy will strengthen in the coming 12 months. In December, a net 27% predicted a worsening economy. Investors also say that liquidity conditions and the ease of trading have bounced back, it says.

“Improved liquidity has aided this rally, but it’s important to emphasize that it also reflects improving economic sentiment. Hard economic data has to continue improving to sustain a recovery,” said Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.

“The strongest indication of risk appetite is investors’ definitive move into cyclicals from defensive stocks and the closing of underweight positions in banks, especially in Europe,” added Gary Baker, head of European equities strategy at BofA.

Additionally, as risk appetites have risen, investors have bolstered their allocations to emerging market equities, the survey says. It reports that a net 44% of asset allocators are overweight emerging market equities this month, up from a net 20% in January. Demand for commodities has risen too, with a net 10% of global asset allocators overweight the asset class, up from a net 5% one month ago.

And, a growing majority of investors now believes that the Chinese economy is heading for a soft rather than hard landing. Looking ahead, a net 36% of the global panel says that they would like to overweight emerging markets more than any other region, Merrill says. Not only is this an increase on January’s reading, but investors have expressed that they would like to underweight all other regions, including the U.S., it adds. Only a net 5% of the global investor panel says that the eurozone is the region they would most like to underweight, compared with a net 29% in January.

While economic sentiment among Japanese fund managers has soared, global investors have yet to make a concerted move back to Japanese equities, Merrill says. A net 81% of Japanese respondents now expect the country’s economy to strengthen in the coming year, up from a net 47% last month. Yet, globally, a net 23% of asset allocators retain an underweight position in Japan, down five percentage points from January, and higher than in December. Japan is now the least loved region in the survey for global fund managers, surpassing even the eurozone, it says.

An overall total of 277 panelists with US$783 billion of assets under management participated in the survey from February 3 to 9.