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Survey finds bearish sentiment waning as risk appetite improves

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Bearish sentiment among investors about the outlook for the global economy and corporate earnings has eased, according to the BofA Merrill Lynch Survey of Fund Managers for August.

The survey shows a net five per cent of respondents predicting that the global economy will improve in the next year. This represents a modest turnaround from July when a net 12 per cent of respondents predicted the world economy would deteriorate.

While the percentage of respondents expecting below-trend growth and inflation remained unchanged at 73 per cent in August, the survey shows recession fears easing. A net 78 per cent of respondents think a double-dip recession is unlikely. After a deflation shock last month investors have shifted their focus back towards inflation.

The survey shows an almost neutral view on the prospects for a rise in global inflation in the next year. Just one per cent of respondents expect inflation to be lower in 12 months time, compared to a net 12 per cent in July. In addition, a net 14 per cent of asset allocators indicated that global monetary policy is too stimulative, compared to just five per cent in July. Nonetheless, 55 per cent of respondents to the survey are ruling out any rate hike in the US before the third quarter of 2011.

A key indicator tracking investors’ risk and liquidity conditions returned to an almost neutral reading, indicating an improvement in sentiment.

"The spotlight of investor pessimism has shifted away from China and Europe to Japan and the US. Investors clearly remain cautious, so better news on US growth and fiscal policy would be a pleasant surprise," says Michael Hartnett, chief global equities strategist at BofA Merrill Lynch Global Research.

Asset allocators reduced their cash holdings. A net seven per cent were overweight cash in August, compared to 13 per cent in July and 19 per cent in June. While there was an uptick in allocation to equities, there was a drop in allocation to bonds. A net 23 per cent were underweight bonds in August, compared to a net 15 per cent underweight in July.

The survey also shows a sharp drop in investors’ appetite for US and Japanese equities, but a recovery in demand for Eurozone equities.

A net 14 per cent of asset allocators are underweight US equities, compared to seven per cent overweight in July. Global asset allocators have also reduced their exposure to Japanese equities. A net 27 per cent were underweight Japanese equities in August, compared to a net seven per cent in June.

In contrast, a net 11 per cent were overweight Eurozone equities in August, the most positive reading since October 2009. This compares to a net ten per cent who were underweight a month earlier. There was also good news for UK equities, on which investors are the most optimistic they have been since May 2007.

Global emerging markets increased in popularity as concerns about a weakening of the Chinese economy waned. A net 38 per cent of global asset allocators are overweight GEM equities, up from 34 per cent in July and 31 per cent in June.

Bearish sentiment towards the Chinese economy eased markedly. A net 19 per cent of respondents expect the Chinese economy to weaken over the next year, compared to39 per cent just a month ago. This improved sentiment was supported by a shift towards commodities. A net nine per cent of respondents were overweight commodities in August, compared to a net one per cent underweight in July.

Banks, consistently one of the most unloved sectors, finally saw a sharp improvement from a net 28 per cent underweight in July to a net 19 per cent underweight this month. This ranked alongside industrials as the biggest sector shift by investors. On the other hand, utilities and pharmaceuticals suffered steep declines in support.

The survey reveals that asset allocators think the US dollar looks undervalued, while the Japanese yen is seen as overvalued. A net 23 per cent of respondents regard the dollar as undervalued, compared to just three per cent in July. A net 62 per cent see the yen as overvalued – a survey record – versus 55 per cent a month earlier.

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