April 15, 2011

BofA-Merrill Survey Shows Bump in Risk Tolerance

Investors seem convinced that rates will remain low and have reduced their cash holdings in favor of equity positions.

A recent Bank of America-Merrill Lynch survey of fund managers found that investors have regained their appetite for risk despite rising concerns over the world economy and the corporate-profit outlook.

Investors appear to have a growing conviction that rates will remain low and have reduced their cash holdings and increased equity positions, most notably in global emerging markets, the survey shows.

Average cash balances fell to about 3.7% of portfolios in early April, down from 4.1% in March, according to the survey of 282 fund managers with about $757 billion in assets under management.

Some 11% of respondents are overweight cash, down from a net 18% last month. And 50% of asset allocators are overweight equities, up from a net 45% one month ago.

As for emerging-market stocks, about 22% of investors are overweight, up from a zero in March. Asset allocators have also increased their exposure to commodities, and 24 are overweight in the asset class this month, up three percentage points from March.

In terms of an overall outlook, the proportion of the fund-manager panel that believes the world economy will strengthen in the next 12 months has fallen to a 27% from 58% in February. Also, just 19% of respondents expect corporate profits to improve in the coming year, compared with a 32% in March.

Central banks have succeeded in re-inflating economies, but investors are split on whether they have stimulated real economic growth," said Gary Baker, head of European-equities strategy at BofA Merrill Lynch global research, in a statement.

"Investors are reluctantly overweight equities," added Michael Hartnett, chief global-equity strategist. "The combination of zero rates and rising inflation makes them fearful of bonds and cash."

Emerging Markets

Though 25% of respondents expect China's economy to weaken in the coming year, sentiment towards the region's equities has improved. More than 20% of regional fund managers say that emerging markets are where they most want to take an overweight position in the future.

Close to 30% of respondents believe that emerging-markets corporates have the most attractive profit outlook. In addition, among global emerging-markets investors, Asia is the most preferred market for 58% of those surveyed, while Latin America is the least preferred.

Still, 30% of asset allocators are overweight U.S. equities in April, up from a net 23% in March. In addition, 48% believe that the outlook for U.S. corporate profits is stronger than any other region.

In Europe, though, less than 10% of the panel believes the region's economy will strengthen in the next 12 months, down sharply from a net 32% in March. Nonetheless, cash positions fell in April to an average 3.3% of portfolios, down from 3.7% in March.

 


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