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BofA Merrill Lynch survey sees surge in support for equities

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Positive economic sentiment has helped drive investor appetite for global equities to its highest level in 3 1/2 years, according to the BofA Merrill Lynch Survey of Fund Managers for January.

A net 55 per cent of asset allocators say that they are overweight global equities, the highest reading since July 2007. It represents a significant increase from December when a net 40 per cent was overweight the asset class. At the same time, bond allocations fell. A net 54 per cent is underweight bonds, up from a net 47 per cent a month ago.
 
Behind this rise is growing confidence in the global economy and corporate profits. A net 55 per cent of investors expect the world’s economy to strengthen in 2011 with 39 per cent predicting “above trend” growth in the coming 12 months, the highest reading since the question was introduced in February 2008. A net 57 per cent believes that corporate profits will rise 10 per cent or more this year, up from 45 per cent in December.
 
A growing majority expects global inflation to increase this year – a net 72 per cent in January, up from a net 48 per cent two months ago. But higher inflation is not seen necessarily as a threat. A net 42 per cent of investors believe monetary policy is “too stimulative,” fewer than in November.
 
“The combination of growth optimism and a benign view towards higher inflation provide a potent case for equity investment,” says Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research. “

Growing belief in US equities, already evident in December’s survey, has firmed significantly this month. A net 27 per cent of the global panel is now overweight US. equities, the highest reading since November 2008 and surpassing December’s level of a net 16 per cent.
 
A net 15 per cent of the panel would like to overweight US equities more than any other region, up from a net 7 per cent in December. A net 43 per cent expects the US dollar to appreciate versus the euro or the yen on a trade-weighted basis, up from a net 14 per cent two months ago.  
 
Japan has also benefited from improved sentiment. Global investors have moved overweight Japanese equities for the first time since May 2010 and for only the fifth month in 3 1/2 years. A net 5 per cent of the global panel is overweight Japanese equities, compared with a net 29 per cent being underweight in November.
 
Domestic Japanese sentiment is strengthening. A net 57 per cent of respondents to the regional Japanese survey expect the country’s economy to improve this year, up from a net 42 per cent in December. Sentiment has improved steadily since September last year when there was an even split between those predicting a stronger economy and those expecting weakness.
 
Global emerging market support remains high but has continued to decline. A net 43 per cent of asset allocators are overweight GEM equities, but this is lower than the net 56 per cent two months ago. A net 20 per cent of investors want to overweight GEM equities more than any other region. This reading has slipped from a net 31 per cent in December. These lower readings come as belief in China’s economic prospects has eroded. A net 19 per cent of respondents to the regional survey say that China’s economy will weaken this year. Two months ago, a net 16 per cent forecast a stronger Chinese economy.
 
Commodities investment, a bellwether for emerging market optimism, has fallen with a net 16 per cent of asset allocators overweight the asset class compared with a net 22 per cent a month ago. This fall comes despite the fact that commodities traditionally benefit when investors expect higher inflation.
 
European fund managers have started 2011 in stronger spirits. The proportion of the panel predicting a stronger European economy has leapt to a net 44 per cent from a net 26 per cent last month. An increasing number believe European companies will deliver improved earnings in 2011. This optimism comes as global concerns about EU sovereign debt fund risk have fallen away from the highs of December.
  
A total of 199 fund managers, managing a total of USD562 billion, participated in the global survey from 7 January to 13 January. A total of 169 managers, managing USD412 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.

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