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Risk appetite soars in wake of QE2

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Investors embraced riskier assets, notably equities and commodities, after the resumption of quantitative easing but a correction could be nearing, according to the BofA Merrill Lynch survey of fund managers for November.



A net 35 per cent of investors see the global economy strengthening in the next year, compared to 15 per cent a month earlier.

A net 41 per cent anticipate corporate profits rising by ten per cent or more in the same period.

This constructive outlook has left a net 41 per cent of fund managers overweight equities, up from 27 per cent in October.

Their investment strategies have now risen to a normal level of risk-taking, compared to a net 33 per cent reporting below-normal stances as recently as September.

While QE and positive macroeconomic data have bolstered the growth outlook – with the exceptions of China and Europe – the survey also reveals increased concern over inflation and warning signs of a potential near-term market correction. The number of global investors overweight cash has reached a seven-year low as more focus on the near term. A net 30 per cent say their investment time horizon is shorter than normal, up from 25 per cent a month ago.

“Following QE2, we have witnessed a capitulation into risk assets to a degree that history suggests should prompt concern. Cash holdings, especially, are dangerously low at 3.5 per cent of portfolios,” says Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research.

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 per cent, up from a net 27 per cent in October. A net 45 per cent believe that global monetary policy is “too stimulative”, after the second round of quantitative easing by the US Federal Reserve.

A net 41 per cent of asset allocators were overweight equities this month, up from a net 27 per cent in October and a climb of 31 per cent since September.

Allocations to global emerging market equities have continued to rise and this month reached their highest level in nearly seven years. A net 56 per cent of the panel is overweight GEM, up from a net 32 per cent just two months ago.

Commodities have also grown in popularity with a net 21 per cent of asset allocators overweight the asset class compared with 17 per cent a month ago. Investors have also increased their equity allocation to basic materials stocks with a net 21 per cent overweight the sector, up from a net nine per cent in October.

In contrast, allocations to bonds slipped further with a net 36 per cent of the panel underweight bonds in November, up from a net 24 per cent in October.

More than a third of global investors have identified EU sovereign funding as their key risk. Concern about the public finances of several EU states is reflected in a cautious outlook for the European economy. A net 23 per cent of European respondents expect the region’s economy to strengthen in the coming 12 months. This represents a more muted pick-up in outlook than elsewhere – except China, where a net 16 per cent of respondents now expect a stronger economy, down from October’s 19 per cent.

Overweight positions in eurozone stocks increased in November to a net 15 per cent of investors, up from October’s net three per cent. But the proportion of investors who name the region as their top pick for underweighting in the next year also rose to a net 12 per cent.

“As concern about EU sovereign debt risk grows, European investors are focusing on growth drivers outside the region,” says Patrik Schowitz, European equities strategist. “Investors’ highest equity allocations are to resources and exporting sectors such as technology and industrials.”

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