Investors embraced riskier assets after the resumption of quantitative easing (QE), but a correction could be drawing near, according to the BofA Merrill Lynch Survey of Fund Managers for November released Tuesday.
A net 35% of investors see the global economy strengthening in the next year, compared with 15% a month earlier. A net 41% expect corporate profits to rise by 10% or more in the same period. This constructive outlook has left a net 41% of fund managers overweight equities, up from 27% in October. Their investment strategies have now risen to a normal level of risk-taking, compared with a net 33% reporting below-normal stances as recently as September.
At the same time, the survey reveals increased concern over inflation and warning signs of a potential near-term market correction. The number of global investors overweight in cash has reached a seven-year low as more focus on the near term. A net 30% say their investment time horizon is shorter than normal, up from 25% a month ago.
“Following QE2, we have witnessed a capitulation into risk assets to a degree that history suggests should prompt concern,” Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research, said in a statement. “Cash holdings, especially, are dangerously low at 3.5% of portfolios.”
Michael Hartnett, the firm’s chief global equity strategist, suggested in the statement that the year-end rally may already have occurred, “leaving investors vulnerable to event risk such as a deepening European sovereign debt crisis or a dollar rally.”
According to the study, investors and asset allocators have headed into positions that take advantage of and protect against higher inflation. November’s survey shows significant shifts into equities and commodities.
The proportion of investors expecting inflation to rise in the next 12 months has spiked to a net 48%, up from a net 27% in October. A net 45% believe that global monetary policy is “too stimulative,” after the second round of quantitative easing by the U.S. Federal Reserve.
A net 41% of asset allocators were overweight equities this month, up from a net 27% in October and a climb of 31% since September.