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Survey finds growing optimism in global economic outlook

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Investors are at their most optimistic about the global economy since December 2005, but the prolonged banking crisis is stopping them from putting cash into equities, according to a su

Investors are at their most optimistic about the global economy since December 2005, but the prolonged banking crisis is stopping them from putting cash into equities, according to a survey by Merrill Lynch.

For the first time in more than three years, investors do not predict lower global economic growth over the next 12 months. Renewed optimism about China’s economy lies at the heart of this revival. Just two months ago, a net 70 per cent of respondents thought China’s economy would worsen in the year ahead. That figure fell to a net one per cent this month.

At the same time, risk appetite has dropped with investor pessimism towards banks at a record high. A net 48 per cent of asset allocators said they are underweight banks this month, up from a net 39 per cent in February. A total of 22 per cent said they are aggressively underweight banks, versus 17 per cent in February. Respondents are noticeably bearish about Japanese and eurozone equities.

"How investors resolve this anomaly between growth optimism and risk reluctance will determine the fate of equity markets this spring," says Michael Hartnett, Banc of America Securities-Merrill Lynch co-head of international investment strategy.

Risk appetite in equities took a marked downward turn in March despite the improved economic outlook. Respondents say they have reduced their equity exposure in the past month while increasing cash holdings and fixed-income investments.

A net 41 per cent of respondents are underweight equities, up from a net 34 per cent in February. World equities fell by 15.5 per cent during the days the survey took place. Investors appeared to have flooded into bonds with a net 26 per cent of the panel overweight the assets class, up sharply from a net seven per cent the previous month. Average cash balances rose to 5.2 per cent from 4.9 per cent in February.

Signs of an early recovery phase have appeared, however. A net 42 per cent of the panel believes equities are undervalued, up from a net 24 per cent in February. Changes in sector allocation indicate a movement out of the most defensive stocks, such as in pharmaceuticals where a net 30 per cent are now overweight the sector, down from a net 37 per cent in February. At the same time the panel has increased exposure to technology, a much more cyclical industry. A net 28 per cent of respondents are overweight the sector, up from a net 15 per cent in February.

The survey also found that while the US continues to fuel economic optimism, investors have become more bullish about emerging markets, especially China.

Respondents have taken a net overweight position in emerging markets equities for the first time since August 2008. A net four per cent are overweight the sector compared with net four per cent being underweight in February. At the same time, commodities have made further gains with the number of investors underweight the asset class falling to a net six per cent, down from a net 25 per cent in January.

Investors have further reduced equity investment in the eurozone and Japan. A net 40 per cent of respondents are now underweight eurozone equities and a net 39 per cent are underweight Japanese equities.

A total of 213 fund managers, managing a total of USD533bn, participated in the global survey from 6 March to 12 March. A total of 183 managers, managing USD365b, participated in the regional surveys.

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