Investors have rediscovered their risk appetite and are putting cash reserves to work across the equity markets, according to the BofA Merrill Lynch survey of fund managers for January.
For the first time since January 2006 the survey shows investors are taking above average risk, relative to their benchmark.
A net two per cent is taking “higher than normal” risk, compared with a net seven per cent taking “below normal risk” in December. These figures follow several months of investors displaying optimism about the economy but maintaining a more cautious risk and investment profile.
Average cash balances have fallen to 3.4 per cent, the lowest reading since mid 2007 and down significantly from 4.0 per cent in December. Appetite for equities is strong. A net 52 per cent of asset allocators are overweight equities, up sharply from a net 37 per cent in December.
Fewer investors are protecting themselves against a fall in equities. A net 55 per cent have no protection against a fall in the next three months, compared with a net 48 per cent in December. Investors have been moving into cyclical stocks, are positive about profits and are urging management teams to invest in growth.
"This survey is one of the more bullish we have seen and suggests that investors buy into the idea that this recovery has legs," says Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research. "We are, however, seeing early signs that might alert contrarians looking for a selling opportunity – namely low cash allocations and possible complacency against a sell off in stocks.”
Investors responding to the BofA Merrill Lynch survey are urging companies to invest more in growth and less in balance sheet repair. For the first time since mid 2006, capital investment heads the list of investors’ priorities – ahead of reducing debt and returning cash to shareholders.
Four out of ten respondents say that capital spending is what they most want to see corporates use their cash for. Improving the balance sheet, which has been investors’ priority for the past year and a half, is now in second place.
A net 55 per cent of the panel say that companies are currently under investing, up from a net 48 per cent in December. They are also happy to see companies take on more debt. A net 15 per cent of respondents take the view that corporate balance sheets are “under leveraged”, up from a net nine per cent a month ago.
The desire to see greater investment in growth reflects how optimism about corporate earnings has pushed higher. A net 63 per cent of global investors expect corporate earnings to increase by at least ten per cent over the next 12 months. This represents a significant month on month increase from a net 46 per cent in December. Almost a third of the panel says the ten per cent rise is “very likely”. The outlook for margins is also positive, with a net 40 per cent of investors predicting that operating margins will improve.
Portfolio managers have been showing signs of turning to “laggard” sectors and regions that they have shunned in recent months. Global asset allocators have consolidated positions in technology and energy but they have also increased exposure to banks and consumer discretionary in the past month. The net percentage of respondents underweight banks has fallen to 16 per cent from 37 per cent. European respondents to the regional survey have become more bullish about banks and also automotives.
Japan is back in favour. Within Japan, optimism over the economy and earnings has picked up since November. A net 63 per cent of the regional panel expects a stronger Japanese economy in 2010, up from 30 per cent in November. A net 87 per cent expect improved earnings, up from 59 per cent in November.
The global panel has identified Japanese equities as the most undervalued in the world and over the past two months Japanese equities have become more popular than eurozone equities. Japan is the region that 20 per cent of the panel would most like to overweight in the coming year, versus ten per cent opting for Europe.
A total of 209 fund managers, managing a total of USD539bn, participated in the survey from 8 January to 14 January.
