Investors are more bullish towards global equities than at any time in the past decade, according to the BofA Merrill Lynch Survey of Fund Managers for February.
A net 67 per cent of asset allocators say that they are overweight global equities, the highest reading since the survey began asking this question in April 2001. This represents a significant further increase from January and December when a net 55 and 40 per cent were overweight the asset class, respectively. At the same time, bond and cash allocations continued to fall. A net 66 per cent is underweight bonds, up from a net 54 per cent a month ago, while a net 9 per cent is underweight cash – the lowest allocation since January 2002. The difference between equity overweights and bond underweights has also reached its highest level since the survey began.
An unusual shift in regional allocations accompanies this increase in risk appetite. Only a net 5 per cent of fund managers are now overweight global emerging markets equities, down from January’s net 43 per cent. This represents the steepest monthly decline in emerging market exposure in the survey’s history and compares with the net 28 per cent average weighting since this question was introduced.
In contrast, investors now report more positive stances on key developed markets. Appetite for eurozone equities has increased significantly – a net 11 per cent overweight in February, compared to a net 9 per cent underweight in January. A net 34 per cent of respondents are overweight US equities, up from a net 27 and 16 per cent in January and December, respectively. Moreover, the US and eurozone now rank as the two regions investors would most like to overweight going forward. Yet a month ago more respondents wanted to underweight eurozone equities (a net 17 per cent) than any other region.
“Unusually, higher risk appetite has been accompanied by a dramatic downsizing in asset allocation to emerging markets, as surging global growth expectations have increased the value attractions of developed market alternatives,” says Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
“The surge in equity and commodity weightings, uber-low cash levels, rising inflation expectations and crashing EM allocations indicate that we are no longer in a Goldilocks environment. A jump in rates or weaker growth are the most likely catalysts for a spring correction,” says Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research.
Investors remain confident in the global economy and corporate profits, even though their expectation of a future increase in US interest rates has moved forward. A net 70 per cent now see the Federal Reserve raising rates in the next year, compared to January’s net 62 per cent. This marks the first time in a year that respondents have accelerated their timetable for higher US rates.
Eighty-six per cent of fund managers see short-term interest higher in 12 months’ time. This represents a 19-point rise since December.
An increasing majority expects global inflation to increase this year – a net 75 per cent in February, up from a net 48 per cent three months ago.
Nonetheless, a net 58 per cent of investors expect the world’s economy to strengthen in 2011, a 3-point rise from last month. This should be reflected in corporate profits, which a net 68 per cent anticipates rising 10 per cent or more this year – up from 57 per cent and 45 per cent in January and December, respectively.
An important component of inflation, commodity prices, now ranks as the biggest risk that investors identify. A net 33 per cent rank it ahead of all other threats, up from a net 13 per cent in January. This is reflected in their more negative outlook for corporate profit margins. A net 2 per cent now say operating margins will fall in the next 12 months, compared to a net 10 per cent who saw this measure improving over the same timescale last month.
At the same time, a growing number of fund managers are seeking to benefit from rising commodity prices. A net 28 per cent are now overweighting the asset class, up from a net 16 per cent a month earlier.
Fund managers’ greater risk appetite is reflected in their very strong rotation between equity sectors. While increasing their overweight stance on technology shares (up to a net 51 per cent, from a net 39 per cent in January), they report notably greater confidence in financials and lower appetite for defensive stocks. Underweights in banks and insurers fell to a net 7 per cent each, down from January’s respective net 21 per cent and a net 15 per cent. In contrast, they turned negative on pharmaceuticals (net 4 per cent underweight, from a net 12 per cent overweight a month earlier). Negative stances on consumer discretionary, consumer staples and utilities all intensified as well.
Clear regional differences underlie these global shifts. With EU sovereign funding no longer so pronounced a concern as in January, European respondents trimmed their underweight on banks by as much as 40 points – from a net 56 per cent to a net 16 per cent. In contrast, US investors are more negative towards the sector this month.
A total of 188 fund managers, managing a total of USD569 billion, participated in the global survey from 4 February to 10 February. A total of 154 managers, managing USD384 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS. Through its international network in more than 50 countries, TNS provides market information services in over 80 countries to national and multi-national organisations. It is ranked as the fourth-largest market information group in the world.