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Nervous investors pause for breath after summer rush, Merrill Lynch survey finds

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Investors’ optimism consolidated last month after its surge in August, with portfolio managers reassessing their positions to gradually embrace the current global economic recovery, acc

Investors’ optimism consolidated last month after its surge in August, with portfolio managers reassessing their positions to gradually embrace the current global economic recovery, according to the Merrill Lynch Survey of Fund Managers for September.

Investors remain optimistic that the global economy is moving out of recession and towards the ‘Goldilocks’ scenario where conditions are neither too hot nor too cold.

While a net 72 per cent of the panel expects the world economy to strengthen over the coming year, the same proportion also sees ‘below trend growth and below trend inflation’ over the next 12 months.

Cash levels increased with average cash balances rising to 4.1 per cent of total assets, compared with 3.7 per cent in August, which had been the lowest level since July 2007.

The net number of asset allocators overweight cash increased to ten per cent from three per cent one month earlier. The proportion of asset allocators overweight equities slipped to a net 27 per cent from a net 34 per cent in August.

Investors lowered their allocations to eight out of 11 industry sectors. August’s tentative steps back to cyclical stocks were reversed. Panelists reduced their positions in materials, industrials and discretionary stocks.

‘September’s jump in cash levels and lower equity exposure shows that investors’ risk appetite lags their confidence in the recovery,’ says Gary Baker, head of European equity strategy at Banc of America Securities-Merrill Lynch Research.

The eurozone is close to completing the journey from pariah region to a destination of choice. Just a net one per cent of respondents to September’s global survey is underweight the eurozone, down from 13 per cent in August. It is the most positive stance on the region since February 2008 when asset allocators held a slight overweight position.

This return to neutrality represents a large swing opinion from the lows of March when 40 per cent of the panel was underweight the eurozone. Increased enthusiasm for Europe, however, has yet to extend to the UK. This month a net ten percent of asset allocators were underweight UK equities, only a marginal improvement from 13 per cent in August.

Respondents are also optimistic about Europe’s future. A net seven per cent of respondents said they intend to take overweight positions in eurozone equities over the next 12 months. In July a net 30 per cent said they would retain underweight positions for the following 12 months.

According to the survey, fund managers within Europe bucked the global trend by reducing cash levels. A net 21 per cent of respondents were overweight cash, down from 29 per cent in August. The average cash balance fell to 3.0 per cent from 3.7 per cent the previous month.

Investors in Europe are showing a shortage of confidence and conviction in deciding which sectors to overweight. Technology and telecoms are the sectors in which the regional panel has retained overweight positions in September. Even here, position sizes are small. The most popular reading typically achieves a reading of 40 per cent, but this month is little over half the average.

In contrast, investors appear to be acting with conviction when deciding on their underweight positions. Investors hold high conviction in underweighting four sectors. The highest underweight score (net -41 per cent for personal and household) is in line with the long-run average for the most unloved sector.

‘The low level overweight readings this month show a lack of sector consensus among European fund managers and leave our measure of sector conviction at its fourth-lowest level in survey history and at its lowest since late 2004,’ says Patrik Schöwitz, European equity strategist at Banc of America Securities-Merrill Lynch.

A total of 234 fund managers, managing a total of USD667bn, participated in the global survey from 4 September to 10 September.

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