Institutional investors see a brighter economic picture, and are putting more money into equities, according to the BofA Merrill Lynch Fund Manager Survey for January.
The firm reports that asset allocators are assigning more funds to equities than at any time since February 2011, and that their confidence in the world’s economic outlook has reached its most positive level since April 2010.
Investors’ appetite for risk in their portfolios is now at its highest in nine years, while an increasing number judge equities as undervalued, particularly in Europe, it says. It notes that investors have reduced cash holdings to 3.8% from 4.2% in December.
“This marks the most positive reading of this measure of willingness to hold riskier investment assets since April 2011, though it has not reached levels that would represent a contrarian sell signal,” it says.
Merrill says that investors’ bullishness reflects a growing confidence in economic recovery. It reports that a net 59% now expect the global economy to strengthen this year, compared to a net 40% a month ago. And, along with that renewed optimism, it says an increasing proportion of respondents expect inflation to pick up as well.
“Following the resolution of the U.S. fiscal cliff, sentiment has surged. Half of investors now tell us that they would sell government bonds to buy higher-beta stocks, which is consistent with increasing growth and inflation expectations, and with our call for a ‘Great Rotation’ to start in 2013,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
Indeed, it says that 49% now expect government bonds to be sold to fund purchases of higher beta equities and sustain the ‘risk on’ rally.
However, notwithstanding the passing of the fiscal cliff deadline, the survey also finds that the U.S. fiscal crisis remains the biggest tail risk for asset markets; although this fear has diminished. And, the perception of Italy as a substantial ‘tail risk’ for Europe has declined sharply too, it notes. Instead, fears about France and Spain have worsened from last month, it notes.
The survey also reports that the panel has shifted its stance on financial stocks strongly, moving to its first net overweight in global bank names since February 2007. And, it says, banks are still perceived as the global equity market’s most undervalued sector.
In contrast, appetite for telecoms stocks has fallen to a net 25% underweight, it reports, noting that this marks the sector’s lowest weighting since December 2005. The perception that consumer staples companies are the most overvalued has also accelerated, it adds.
An overall total of 254 panelists with US$754 billion of assets under management participated in the survey from January 4 to 10.