Corporate Finance: What Big Investors Want

by CFO Innovation Staff, 25 January 2010

0 comments

Facebook

Digg

Twitter

tags:
emerging markets fund managers institutional investors Merrill Lynch sentiment

Every month for more than a decade, BofA Merrill Lynch has been polling some 300 institutional, retail, and hedge fund managers around the world about their allocation for assets, outlook on the on the economy and their expectations of the corporates they invest in. The results for January 2010 have just been released.

The key message to CFOs: Fund managers are now urging companies to invest more in growth and less in repairing balance sheets. For the first time since the middle of 2006, capital investment now heads the list of what investors want to see companies do – ahead of reducing debt and returning cash to shareholders.

Start Spending, CFOs

Four out of ten of the 209 respondents, who among them manage a total of US$539 billion in assets, rank capital spending No. 1 in the list of priorities of businesses. Bolstering the balance sheet, the investors’ top-ranked priority in the past year-and-a half, has now dropped to second place.

A net 55% of the panel believe that businesses are currently under-investing. In the December survey, a net of 48% made the same judgement. They would not mind businesses taking no more debt to finance the capex they want to see. A net 15% of the investors surveyed say that corporate balance sheets are under-leveraged anyway. Only 9% believe this to be the case a month ago.

In its analysis, the Merrill Lynch researchers linked the investor desire to see increased investment in growth to improved optimism on corporate earnings. A net 63% of global investors expect profits to rise by at least 10% over the next 12 months. That’s significantly higher than the net 46% who held the same view in December. The outlook for margins is also positive, with a net 40% of the fund managers polled predicting improvements in operating margins.

Great Expectations

“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. But there are warning signs, too. “We are 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,” said Michael Hartnett, the investment bank’s chief global equities strategist.

For now, the bulls seem to be in the ascendant. For the first time in four years, investors are taking above-average risk relative to their benchmark. The BofA-ML Risk and Liquidity Appetite Indicator, which measures the propensity of the survey’s respondents to take on risk, now stands at 46 points. That’s more than one standard deviation above the long-run average.

Fewer respondents are protecting themselves against a fall in the value of equities. A net 55% of the investors surveyed indicate they have no protection at all against an implosion in the next three months. The unprotected proportion in December was a 48%.

Average cash balances have fallen to 3.4% of total assets, the lowest reading since mid- 2007. It’s down significantly from 4% in December. The appetite for stocks is strong. A net 52% of respondents who are asset allocators are overweight equities, up sharply from a net 37% last month.

Comment on this article

Accounting and Regulations

CFO innovation Asia Accounting and Regulation the Asia Pacific resource center for senior finance executives, daily news, analysis, best practice and case studies in Accounting Regulation, IFRS, US GAAP, Tax, investor relations, corporate governance, Corporate Law, Financial Regulators, Internal Audit, Audit, Corporate Law.

Auditing, Investor Relations, Law and Compliance, Tax

Finance and Banking

CFO innovation Asia, Finance and Banking the Asia Pacific resource center for senior finance executives, daily news, analysis, best practice and case studies in Corporate Finance, trade finance, treasury and risk management, capital expenditure, Banking, mergers and acquisitions

Cash and Liquidity Management, Corporate Finance, Insurance, Treasury Management

Management

CFO innovation Asia the Asia Pacific resource center for senior finance executives, daily news, analysis, best practice and case studies in Finance Management, Corporate Governance, Human Resource Management, Compensation and Benefits, Mergers and Acquisitions, Professional Development, Corporate Real Estate, Risk Management, Budgeting and Forecasting, Business Process Management, Business Process Reengineering, Outsourcing.

Budgeting and Planning, Business Expense Management, Human Capital Management, Outsourcing and Shared Services, Risk Management

Metrics

Corporates, Financial Services

Technology

CFO innovation Asia Technology the Asia Pacific resource center for senior finance executives, daily news, analysis, best practice and case studies in Finance Systems, Business Intelligence, EPR, Accounting software, CRM, Cloud Computing, Telecommunications, Business Process Outsourcing, Business Process Management Software.

Business Intelligence, Enterprise Software and Systems, Financial Systems, Security

CFO innovation ASIA