Investors are channeling most of their renewed risk appetite into global emerging market equities (GEM) in the wake of an expected second wave of quantitative easing, according to the BofA Merrill Lynch Survey of Fund Managers for October.
The level of risk that investors are taking in their portfolios rose more sharply than in any month since April 2009. Hedge funds continued to add to their net equity exposure. The proportion of asset allocators overweight equities nearly tripled to a net 27 percent from a net 10 per cent in September, while they extended underweight positions in bonds. The proportion of portfolio managers overweight cash fell to a net 6 per cent from a net 18 per cent.
The vast majority of this movement into equities was into GEM. A net 49 per cent of asset allocators are overweight GEM, a monthly rise of 17 percentage points. Appetite for U.S., eurozone and Japanese equities remained stable while the panel became less bearish about the U.K.
Portfolio managers are more optimistic about Chinaâ€™s growth over the coming year. A net 19 per cent expects Chinaâ€™s economy to strengthen in the next 12 months, up from a net 11 percent in September and 38 percentage points above Augustâ€™s level.
â€œEuropean stocks, especially in cyclical sectors, are riding on the coat tails of QE expectations with as yet no sign of a pick-up in underlying macro fundamentals,â€ said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research. â€œWhile improved risk appetite is to be welcomed, one proviso is just how narrow the investor focus on GEM is at this point,â€ said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Global Research.
Investors display confidence over cyclical and corporate outlook
As well as the dramatic moves into emerging markets, evidence of a broader pick up in risk appetite is apparent in Octoberâ€™s survey. Demand for commodity exposure recovered with a net 17 per cent of the panel overweight in October, compared with a net 4 per cent the previous month.
Asset allocators shifted from their defensive sector positions of September back towards cyclical and growth stocks. A net 25 per cent of the panel is underweight Utilities, up from 11 per cent a month earlier. The biggest gains were in Industrials, Materials and Technology. A net 15 per cent of asset allocators are overweight Industrials in October, up 11 percentage points.
Investors are 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.
A net 41 and 43 per cent would like to see companies pay out surplus cash (or make acquisitions) and raise more debt, up from a respective 34 and 35 per cent the previous month. The proportion of investors wanting companies to prioritize balance sheet repair nearly halved month-on-month, falling to a net 11 per cent. A net 11 per cent of the panel says that profits will improve over the next 12 months, up from a net 2 per cent in September.
QE expectations curb currency conviction
Octoberâ€™s survey shows an absence of strong conviction among investors towards U.S. or eurozone equities. A net 4 per cent are underweight the U.S., a net 3 per cent are overweight the eurozone and investors have also moved to a neutral position in U.K. equities from being underweight in September. In contrast asset allocators moved even more underweight Japan.
These positions reflect notable uncertainty over the direction of the dollar and the euro. While growing numbers of investors believe the US dollar is undervalued, the prospect of quantitative easing (QE) in the US is countering potential dollar appetite and raising expectations of inflation. The proportion of investors predicting higher global inflation jumped to a net 27 per cent from a net 9 per cent in September.
A net 45 per cent of fund managers now regard the US dollar as undervalued (up from a net 18 per cent last month) and the same proportion see the euro as overvalued. But only a net 12 per cent of the panel expect the U.S. dollar to gain against a basket of key currencies over the next 12 months.
Gold, propelled to new highs by its safe-haven status, is viewed as overvalued by a net 24 per cent of the panel, double the level of two months ago.
Survey of Fund Managers
A total of 194 fund managers, managing a total of US$492 billion, participated in the global survey from 8 October to 14 October. A total of 167 managers, managing US$392 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.
The BofA Merrill Lynch Global Research franchise covers over 3,100 stocks globally and ranks in the top tier in many external surveys. Most recently, the group was named 2010 Top Global Broker (second consecutive year), Top Europe Broker, No. 2 U.S. Broker and No. 3 Asia broker by Financial Times/StarMine. The team was also named Best Brokerage by Forbes/Zacks for the second consecutive year.
In addition, the group was named No. 1 in the 2010 Institutional Investor All-Emerging Europe and All-Latin America Research team surveys and No.3 in the 2010 Institutional Investor All-America Equity, All-Fixed Income and All-Europe Research team surveys. The group was also the winner of Emerging Marketsâ€™ EM Research Global Award for 2010.