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Investors are channeling most of their renewed risk appetite into global emerging market equities (GEM) in the wake of an expected second wave of quantitative easing, according to the BofA Merrill Lynch Survey of Fund Managers for October.

The level of risk that investors took in their portfolios in September rose more sharply than in any month since April 2009. Hedge funds continued to add to their net equity exposure. The proportion of asset allocators overweight equities nearly tripled to a net 27% from a net 10% in September, while they extended underweight positions in bonds. The proportion of portfolio managers overweight cash fell to a net 6% from a net 18%.

The vast majority of this movement into equities was into GEM. A net 49% of asset allocators are overweight GEM, a monthly rise of 17%age points. Appetite for U.S., eurozone and Japanese equities remained stable while the panel became less bearish about the U.K.

Portfolio managers are more optimistic about China's growth over the coming year. A net 19% expects China's economy to strengthen in the next 12 months, up from a net 11% in September and 38 percentage points above August's level.

Confidence Over Cyclical and Corporate Outlook

As well as the dramatic moves into emerging markets, evidence of a broader pickup in risk appetite is apparent in October's survey. Demand for commodity exposure recovered with a net 17% of the panel overweight in October, compared with a net 4% the previous month.

Asset allocators shifted from their defensive sector positions of September back towards cyclical and growth stocks. A net 25% of the panel is underweight utilities, up from 11% a month earlier. The biggest gains were in industrials, materials and technology. A net 15% of asset allocators are overweight industrials in October, up 11 percentage points.

Investors are more bullish about the outlook for corporate profits and want to see CFOs take a more aggressive stance by investing more in their businesses, returning surplus cash to shareholders and adding debt.

A net 41 and 43% would like to see companies pay out surplus cash (or make acquisitions) and raise more debt, up from a respective 34 and 35% the previous month. The proportion of investors wanting companies to prioritise balance sheet repair nearly halved month-on-month, falling to a net 11%. A net 11% of the panel says that profits will improve over the next 12 months, up from a net 2% in September.

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