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Investor optimism about the global economy has soared to its highest level in nearly six years, with portfolio managers putting their cash back into equity markets, according to the Merrill Lynch Survey of Fund Managers for August.
 
Global emerging markets, led by China, and technology stocks are the strongest engines behind the early recovery. The survey found that investors would rather be overweight emerging markets than any other region, and by some distance. A net 33% of the panel prefers to overweight emerging markets while investor consensus is to remain underweight the US, the eurozone, UK, and Japan.

The survey also show that a net 75% of respondents believe the world economy will strengthen in the coming 12 months, the highest reading since November 2003 and up from 63% in July. Confidence about corporate health is at its highest since January 2004. A net 70% of the panel respondents expect global corporate profits to rise in the coming year, up from 51% last month.  
 
August’s survey shows that investors are matching their sentiment with action, by putting cash to work. Average cash balances have fallen to 3.5% from 4.7% in July, their lowest level since July 2007. Equity allocations have risen sharply month-over-month with a net 34% of respondents overweight the asset class, up from a net 7 % in July. Merrill Lynch’s Risk and Liquidity Indicator, a measure of risk appetite, has risen to 41, the highest in two years.
 
Technology remains the number one sector for investment, with 28% of the global panel overweight the industry. Industrials and materials lag with global fund managers holding 11% and 12% overweight positions respectively.
 
Further behind are banks. Global fund managers remain concerned about the sector, holding a 10% underweight position. In contrast, investors within emerging markets are positive about banks with a net 17% of fund managers in the regional survey overweight bank stocks.
 
Some of these sectoral and regional imbalances are starting to erode, however. Global fund managers have scaled back their underweight positions in bank stocks from 20% in July. Industrials and Materials have recovered from underweight positions one month ago. Emerging markets are less popular than in July when 48% of the panel most wanted to overweight the region. And Europe is a lot less unpopular. In July, a net 30% of respondents wanted to underweight the eurozone. That figure has dropped to just 2% in August.