Investors' appetite for risk at its highest in nine years: BofA-ML

Global investors have entered 2013 in buoyant but not yet exuberant mood, according to the Bank of America- Merrill Lynch (BofA-Merrill Lynch) Fund Manager Survey for January.

“The New Year sees asset allocators assigning more funds to equities than at any time since February 2011, while their confidence in the world’s economic outlook has reached its most positive level since April 2010. Moreover, investors have reduced cash holdings to 3.8 per cent from 4.2 per cent in December. This is the most positive reading of this measure of willingness to hold riskier investment assets since April 2011,” the survey findings suggest.

Investors’ appetite for risk in their portfolios is now at its highest in nine years, while an increasing number judge equities as undervalued – particularly in Europe, findings suggest.

An overall total of 254 panelists with $754 billion of assets under management (AUM) participated in the survey during 4 – 10 January, carried out by BofA-Merrill Lynch with the help of market research company TNS.

Economic recovery

Participants’ perception of the US fiscal crisis as the biggest “tail risk” for asset markets has calmed (down nearly 20 percentage points in two months), though it remains their largest concern. Views on China remain very positive, with a net 63 per cent still anticipating a stronger economy this year, the second highest reading on record.

Investors’ bullishness reflects a growing confidence in economic recovery. As per the survey findings, 59 per cent respondents now expect the global economy to strengthen this year, compared to a net 40 per cent a month ago. An increasing proportion of respondents expect inflation to pick up as well.

“Following the resolution of the US fiscal cliff, sentiment has surged. Half of investors now tell us that they would sell government bonds to buy higher-beta stocks, which is consistent with increasing growth and inflation expectations,” said Michael Hartnett, chief investment strategist at BofA-Merrill Lynch Global Research.

“While the survey reveals pockets of exuberance, undemanding valuations in Europe should underpin equities unless earnings growth fails to materialise,” added John Bilton, European investment strategist.

Emerging markets

For the fourth consecutive month, global asset allocators have reported higher allocations to emerging market (EM) equities (up 40 per cent in January) than the long-term average. Among regions, Russia, China, and Turkey split a three-way tie for the favourite market to start 2013. India also became a modest overweight for the first time since July 2010.

EM fund managers were only overweight three sectors – Consumer Discretionary, Technology, and Financials. Sectors that have traditionally been geared to EM growth – like Materials – are only starting to attract interest from global investors, the survey findings suggest. Unlike equities, commodity allocations fell to an underweight in January and the majority of fund managers (58 per cent) believe oil is fairly valued.

Sectoral preferences

The panel has shifted its stance on financial stocks strongly, moving to its first net overweight in global bank names since February 2007 following a 15 percentage move versus last month.

However, banks are still perceived as the global equity market’s most undervalued sector. The existing overweight in insurance has also been extended, particularly in Europe, and now stands its highest level since January 2007.

In contrast, appetite for telecoms stocks has fallen to a net 25 per cent underweight – the lowest weighting from asset allocators since December 2005. While still in positive territory, pharmaceuticals’ have declined to a net 11 per cent overweight. Their fall from a net 24 per cent last month is January’s largest sectoral move. The perception that consumer staples companies are the most overvalued has also accelerated month-on-month.