Renewed Confidence in Global Equities, Survey

Largest Recorded One-Month Improvement in Liquidity Conditions

Emerging markets benefit from bounce in risk appetite

Investors are showing renewed confidence in global equities amid radically improved market conditions and growing hopes of economic growth, according to the BofA Merrill Lynch Survey of Fund Managers for February.

Allocations towards equities have made the largest one-month leap since the beginning of 2011. A net 26 percent of asset allocators are overweight equities, up from 12 percent last month. Appetite for cyclical stocks, including Industrials and Materials sectors, has picked up while allocations towards defensive stocks, including Pharmaceuticals and Telecoms, have fallen. Investors have also reduced cash levels. A net 13 percent of asset allocators are overweight cash, down from a net 27 percent in January.

A majority of the panel now sees the world economy improving. A net 11 percent says the economy will strengthen in the coming 12 months – in December, a net 27 percent predicted a worsening economy. Investors also say that liquidity conditions and the ease of trading have bounced back. A net 32 percent of the panel assessed liquidity as “positive,” compared with a net 7 percent saying “negative” in January – the largest one-month improvement since the survey first asked the question in October 2007.
“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    equities risk appetite is investors’ definitive move into cyclicals from defensive stocks and the closing of underweight positions in banks, especially in Europe,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.

Emerging markets benefit from bounce in risk appetite

As equities risk appetite has risen, investors have bolstered allocations to emerging markets equities. A net 44 percent of asset allocators are overweight emerging market equities this month, up from a net 20 percent in January. Demand for commodities has risen. A net 10 percent of global asset allocators are overweight the asset class, up from a net 5 percent one month ago.

A growing majority of 86 percent believes the Chinese economy is heading for a soft rather than hard landing. Only a net 2 percent of investors in Asia and emerging markets now believe China’s economy will weaken in the next 12 months, an improvement from a net 23 percent in January.

Looking ahead, a net 36 percent of the global panel says that they would like to overweight emerging markets and equities more than any other region. 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.

Banks back in favor as concerns over Europe ease

European investors have returned in numbers to bank stocks in the past month as sentiment towards Europe has moved from the extremely negative positions recorded in January’s survey. A net 12 percent of European investors are now underweight banks – a positive swing of 38 percentage points from a month ago when a net 50 percent were underweight the sector.

Autos are at their most popular level recorded by the survey with a net 20 percent of investors overweight the sector, up 18 percentage points month-on-month. Investors have also reduced underweight positions in financial services and taken overweight positions in industrials and basic resources.

These moves come as global and regional investors ease skepticism towards Europe. Only a net 5 percent of the global investor panel says that the eurozone is the region they would most like to underweight, compared with a net 29 percent in January. BofA Merrill Lynch’s Growth Composite Indicator for the eurozone is at its highest this month since July 2011.

Investors yet to grasp Japan opportunity

Economic sentiment among Japanese fund managers has soared, but global investors have yet to make a concerted move back to Japanese equities. A net 81 percent of Japanese respondents expect the country’s economy to strengthen in the coming year, up from a net 47 percent last month. Globally, a net 23 percent of asset allocators retain an underweight position in Japan, down just 5 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.

Survey of Fund Managers

An overall total of 277 panelists with US$783 billion of assets under management participated in the survey from 3 to 9 February. A total of 202 managers, managing US$609 billion, participated in the global survey. A total of 150 managers, managing US$368 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS. Through its international network in more than 50 countries, TNS provides market information services in over 80 countries to national and multi-national organizations. It is ranked as the fourth-largest market information group in the world.

 

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