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Investors putting cash to work despite concerns over profits and growth, says BoAML survey

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Global investors have put some of their cash to work in spite of a more downbeat assessment of global growth and corporate profits, according to the BofA Merrill Lynch Fund Manager Survey for January.

Investors have regained a muted risk appetite, turning to US equities, bonds and real estate. The proportion of respondents overweight cash has tumbled to a net 17 per cent from a net 28 per cent last month. Average cash positions have fallen to 4.5 per cent of portfolios, the lowest in six months, down from 5.0 per cent in December.

More than two-thirds of investors say equities will outperform other major asset classes in 2015. Accordingly, a net 51 per cent of asset allocators are overweight equities, down one percentage point since last month but the third-highest reading in the past year. A net 24 per cent of asset allocators are overweight US equities, up from a net 16 per cent a month ago. However, a net 75 per cent say US equities are overvalued – the highest reading since the question first appeared in 2001. The proportion of asset allocators overweight real estate has climbed six percentage points to a net 9 per cent. Investors also reduced net underweight positions in bonds.

Investors are less optimistic about the economy. A net 51 per cent of the panel believes the world economy will improve this year, down from a net 60 per cent in December. But, as deflation surfaces in the Eurozone, expectations of stimulus from the European Central Bank (ECB) are high. This month, 72 per cent predict QE to start in the first quarter. Furthermore, the third quarter is now the most likely timing for a rate hike by the US Federal Reserve, verses the second quarter a month ago.

“Lower oil prices and hopes for policy stimulus are sustaining both global growth expectations and investor confidence,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “Amid expectations of ECB stimulus, consensus is convinced that Europe is the region to overweight in the coming year. But, on an absolute basis, European stocks will be vulnerable to headwinds from outside the region,” says Manish Kabra, European equity and quantitative strategist.

Allocations towards equities remain strong despite concerns about the prospects for profits and margins. A net 8 per cent of global investors expect corporate operating margins to fall in the coming 12 months, up from a net 1 per cent in December. The proportion of the panel expecting corporate profits to improve has fallen to a net 38 per cent from a net 46 per cent.

Only a small minority believes that a double-digit rise in profits is possible in the coming year. A net 53 per cent now says that it is unlikely profits will improve 10 per cent or more, up from a net 32 per cent in December. On a regional basis, a net 41 per cent of the panel says that profit outlooks are the most favourable in the US, with a net 20 per cent backing Japan.

Investors see value in oil and in energy stocks – but it seems too soon for them to have made a move. A net 45 per cent of respondents say that oil is undervalued, up from a net 36 per cent in December and at the highest level in exactly six years. At the same time, a net 30 per cent of the panel says that energy stocks are the most undervalued – up from a net 21 per cent.

Allocators to energy and commodities remain weak. The proportion of investors underweight energy stocks has increased in the past month to a net 25 per cent from a net 22 per cent. Asset allocators have modestly increased allocations to commodities but a net 24 per cent remains underweight.

With questions hanging over China’s economy, bearishness towards Global Emerging Market equities has intensified. A net 13 per cent of asset allocators are underweight the region compared with a net 1 per cent being overweight in December. Furthermore, a net 17 per cent of investors say that emerging markets is the region they most want to underweight in the coming year. A net 41 per cent of respondents to the regional survey say that they expect weaker growth in China in the coming year.

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