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BofA Merrill Lynch Michael Hartnett

Risk appetite rising as belief in Goldilocks recovery takes hold


Investors are demonstrating growing belief in a robust global recovery and have painted a picture of an ideal investment environment, according to the BofA Merrill Lynch survey of fund managers for April.

Belief in macro economic growth has intensified. The number of investors taking “above normal” risk in their portfolios is at its highest since January 2006, and investors are more bullish about the ability of companies to increase profitability.

The number of respondents predicting “above trend growth and below trend inflation” has risen sharply to 32 per cent from 21 per cent in March, the highest reading since the question first appeared in February 2008. Fewer respondents are expecting below trend growth.

Inflationary fears remain subdued and 42 per cent of respondents expect no interest rate hike from the Fed before 2011, up from 38 per cent last month.

Average cash balances have fallen to 3.5 per cent of a portfolio from 3.8 per cent in March.

A net 52 per cent of the panel is overweight equities, up from a net 33 per cent in February, and back to the level seen in January. Within equities, investors have scaled back their underweight positions on banks and raised exposure to cyclical stocks.
“April’s survey shows a growing number of investors envisaging a Goldilocks scenario of above trend growth and benign inflation. The findings are consistent with the view that the US consumer, far from remaining in intensive care, is on the path back to good health,” says Michael Hartnett (pictured), chief global equities strategist at BofA Merrill Lynch Global Research.

Hardened bullishness towards corporate profits is underpinning belief in the recovery. April’s survey shows new-found confidence that companies can generate larger profits and, significantly, can increase margins.

A net 71 per cent of the panel now believes that corporate earnings will rise ten per cent or more over the next 12 months, up sharply from a net 53 per cent in March. A net 42 per cent of respondents believe that corporates can grow their operating margins in the next 12 months, up from a net 27 per cent in March.

Investors’ expectations of higher payouts appear to be rising. A net 25 per cent of the panel say that payout ratios (including dividends and share buybacks) are too low, up from a net 20 per cent in March and the highest reading since August 2007.

Respondents’ desire to see corporates increase capital spending is at its highest since June 2006, with 43 per cent of the panel identifying it as their priority. At the same time their sense of urgency towards balance sheet repair is diminishing. Just 23 per cent of the panel view debt reduction as a priority, the lowest since January 2008.

While investors have been renewing their belief in the corporate outlook they have also increased portfolio allocations towards cyclical stocks. A net 27 per cent of asset allocators are overweight industrials, up from 20 per cent the previous month and the percentage of allocators overweight materials rose to 18 per cent from 12 per cent.

At the same time a net ten per cent of respondents remain underweight banks this month, down from a net 24 per cent in March. One in six investors is now overweight banks, compared with one in ten in March.

Japan is reaping the benefit of investors’ aversion to the eurozone as questions surrounding Greek government debt intensify. A net 12 per cent of global asset allocators are overweight Japanese equities, the highest level since July 2007. In February asset allocators were net underweight Japan. A net 18 per cent of the panel are underweight eurozone equities.

Investors are more positive about the outlook for Japanese corporates. A small majority (net three per cent) of the global panel says Japanese companies have the most favourable outlook of all regions. That was previously a minority view (a net negative four per cent in March). 

“As recently as five months ago investors regarded Europe as the most attractive play on global economic recovery. But with the Greek debt crisis Europe has become a no-go zone and asset allocators now view Japanese equities as a cleaner cyclical play,” says Patrik Schowitz, European equity strategist at BofA Merrill Lynch Global Research.

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