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BofA Merrill Lynch Michael Hartnett

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Investors taking on risk in spite of macro concerns, says BofA Merrill Lynch survey

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Investors have regained their appetite for risk despite rising concerns over the world economy and the corporate profit outlook, according to the BofA Merrill Lynch Survey of Fund Managers for April.

 
Spurred by growing conviction that rates will remain low, investors have reduced their cash holdings and increased equity positions, most notably in global emerging markets. Average cash balances have fallen in April to 3.7 per cent of portfolios, down from 4.1 per cent in March. A net 11 per cent of respondents are overweight cash, down from a net 18 per cent last month. A net 50 per cent of asset allocators are overweight equities, up from a net 45 per cent one month ago.
 
Appetite for emerging market stocks has bounced back with a net 22 per cent overweight, up from a net zero per cent in March. Asset allocators have also increased their exposure to commodities with a net 24 per cent overweight the asset class this month, up three per centage points on March.
 
Investors are putting cash to work while displaying concerns about the outlook. The proportion of the panel believing the world economy will strengthen in the next 12 months has fallen to a net 27 per cent from a net 58 per cent in February. Similarly, only a net 19 per cent of respondents believe corporate profits will improve in the coming year, compared with a net 32 per cent in March.
 
Forty-two per cent of the panel believes that the world economy faces below-trend growth and above-trend inflation. At the same time, a significant number, 29 per cent, expects above-trend growth and above-trend inflation. Energy, frequently used by investors to hedge against inflation, has become the number one global equity sector this month. Other sector allocations indicate a preference for defensive sectors such as pharmaceuticals.
 
“Central banks have succeeded in re-inflating economies, but investors are split on whether they have stimulated real economic growth,” says Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.

Michael Hartnett (pictured), chief Global Equity strategist at BofA Merrill Lynch Global Research, says: “Investors are reluctantly overweight equities”. The combination of zero rates and rising inflation makes them fearful of bonds and cash."

Deepening fears about the future of China’s economy have failed to quell the rebound in positive sentiment towards emerging market equities, especially in Asia. A net 25 per cent of respondents to the regional survey expect China’s economy to weaken in the coming year, up from a net 15 per cent in March.
 
Still, sentiment towards the region’s equities has improved. A net 22 per cent of the panel says that emerging markets is the region that they most want to take an overweight position in the future, the highest reading of all regions this month.
 
Behind the optimism over emerging market equities is belief in the profit outlook. A net 28 per cent of respondents believe that EM corporates have the most attractive profit outlook. Among global emerging markets investors, Asia is the most preferred market for 58 per cent of those surveyed, while Latin America is the least preferred.
 
Investors are looking favourably towards the US A net 30 per cent of asset allocators are overweight US equities in April, up from a net 23 per cent in March. A net 48 per cent believes that the outlook for US corporate profits is stronger than any other region.
 
European investors are also mirroring the global trend of increasing risk in the face of lower expectations. Concern about the future is particularly strong among European investors. Only a net 8 per cent of the European panel believes the region’s economy will strengthen in the next 12 months, down sharply from a net 32 per cent in March. However, cash positions fell in April to an average 3.3 per cent of portfolios, down from 3.7 per cent in March.

Four weeks after the earthquake and tsunami in the northeast of Japan, domestic and international investors have taken sharply negative views on the country. Within Japan, belief in economic growth has come to a halt – respondents are evenly split on whether the economy will grow or slow in the next 12 months.
 
International investors have reduced their exposure to the country’s equities. A net 18 per cent of asset allocators are underweight Japanese equities this month, compared with a net 8 per cent overweight in March. One in six respondents is “aggressively underweight” Japan, though one third of the panel remains neutral. The outlook points to further selling of Japanese equities, however. A net 16 per cent of the panel says that Japan is the region in which they are most likely to take underweight positions.
 
Investors’ desire to see corporates increase capital expenditure is at its highest in five years. Forty-nine per cent of the global panel wants companies to prioritize capital investment over alternatives including repaying debt and increasing dividends. Only 12 per cent are urging corporates to prioritize balance sheet caution, down from 18 per cent one month ago.
  
An overall total 282 panelists with USD757 billion of assets under management participated in the survey from 1 April to 7 April. A total of 199 fund managers, managing a total of USD566 billion, participated in the global survey. A total of 158 managers, managing USD381 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 organizations. It is ranked as the fourth-largest market information group in the world.
 
The BofA Merrill Lynch Global Research franchise covers over 3,200 stocks and 880 credits globally and ranks in the top tier in many external surveys. Most recently, the group was named No1 in the 2011 Institutional Investor All-Japan Research team survey. The group was previously named No1 in the 2010 Institutional Investor All-Emerging Europe and All-Latin America Research team surveys and No. 3 in the 2010 Institutional Investor All-America Equity, All-America Fixed Income and All-Europe Research team surveys.
 
In addition, the group was named 2010 Top Global Broker (second consecutive year), Top Europe Broker, No2 US Broker and No3 Asia broker by Financial Times/StarMine. The team was named Best Brokerage by Forbes/Zacks for the second consecutive year, and was also the winner of the Emerging Markets’ magazine EM Research Global Award for 2010.

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