Merrill Fund Manager Survey Finds Surge in Bullishness

Signs of exuberance appear in rush to emerging markets, according to the May results of Merrill Lynch's survey of fund managers.

Bullishness in global markets has reached new heights, with seven out of 10 investors predicting that the world economy will improve in the next 12 months, according to the Merrill Lynch Survey of Fund Managers for May. The survey includes 220 fund managers with $617 billion in assets.

Positive expectations on corporate profits have led portfolio managers to "put their money to work," the survey says. Average cash holdings have fallen to 4.3 percent from 4.9 percent in April. Equities, while underweight, are more popular, especially cyclical sectors that are expected to perform best in a recovery.

Meanwhile, investors have moved to a net underweight position in bonds for the first time since last August. Many are rushing to emerging markets, as investor optimism on China's economy is higher than at any point in the past six years, the survey explains.

"Investors are finally opening their wallets and reducing cash balances to mid-cycle levels to buy equities, cyclical stocks and risky assets," says Michael Hartnett, Banc of America Securities-Merrill Lynch co-head of international investment strategy. "However, this rush to take on risk, especially in emerging markets, is reminiscent of bubble-like behavior. A record net 40 percent of fund managers are looking to overweight the region in the next 12 months."

"Having addressed their most urgent priority by returning to financial stocks, this month, investors have added exposure to cyclical, real economy stocks and further purged defensive overweight positions," explains Gary Baker, Banc of America Securities-Merrill Lynch co-head of international investment strategy.

Stark Turnaround

Sentiment towards the global economy has completed a sharp turnaround from the dark days of October 2008, when a net 60 percent of investors forecasted a worsening outlook. In May's survey, a net 57 percent say the economy will improve over the next 12 months, up from 26 percent in April.

Nowhere has the reversal in economic outlook been more pronounced than in Europe. A net 35 percent of respondents to the Regional Fund Manager Survey expect Europe's economy to improve in the coming year. That's in sharp contrast to April when a net 26 percent forecasted further deterioration. (The regional surveys include 182 managers with $355 billion in assets.)

Investors have suddenly become bullish about corporate profits with a net 18 percent who say the outlook for global profits will improve in the next 12 months. This represents a big swing from April when a net 12 percent were bearish about profits.

Risk Appetite Returns

The heightened appetite for equities is concentrated on emerging markets. A net 46 percent of investors are overweight emerging market stocks, up from a net 26 percent in April. Bullishness about China's economy has reached its highest level since the survey began tracking China in 2003. A net 61 percent of respondents see its economy improving - in November, a net 87 percent of the panel expected the Chinese economy to weaken.

A shift out of defensive investments towards cyclical stocks is ongoing. For the first time since early 2005, panelists are underweight (net 2 percent) their favorite recessionary sector, pharmaceuticals, compared with a net 21 percent overweight in April. Investors have also reduced holdings in Staples, Telecoms and Utilities in favor of Energy, Materials and Industrials. They have continued to increase allocations to Banks, reducing the net underweight position to the sector's lowest since June 2007.

However, on a less sanguine note, asset allocators have yet to fully embrace equities. A net 6 percent of asset allocators remain under weight equities globally, with significant underweights in Japan, the eurozone and the UK. "The recharged optimism of fund managers is not fully matched by asset allocators. One upside risk for markets is more asset allocation out of cash and bonds into equities," says Hartnett.

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