Investors are more bullish towards global equities than at any time in the past decade, according to the BofA Merrill Lynch Survey of Fund Managers for February.
A net 67 percent of asset allocators say that they are overweight global equities, the highest reading since the survey began asking this question in April 2001. This represents a significant further increase from January and December when a net 55 and 40 percent were overweight the asset class, respectively. At the same time, bond and cash allocations continued to fall. A net 66 percent is underweight bonds, up from a net 54 percent a month ago, while a net 9 percent is underweight cash - the lowest allocation since January 2002. The difference between equity overweights and bond underweights has also reached its highest level since the survey began.
An unusual shift in regional allocations accompanies this increase in risk appetite. Only a net 5 percent of fund managers are now overweight global emerging markets equities, down from January's net 43 percent.
This represents the steepest monthly decline in emerging market exposure in the survey's history and compares with the net 28 percent average weighting since this question was introduced.
In contrast, investors now report more positive stances on key developed markets. Appetite for eurozone equities has increased significantly - a net 11 percent overweight in February, compared to a net 9 percent underweight in January. A net 34 percent of respondents are overweight U.S. equities, up from a net 27 and 16 percent in January and December, respectively. Moreover, the U.S. and eurozone now rank as the two regions investors would most like to overweight going forward. Yet a month ago more respondents wanted to underweight eurozone equities (a net 17 percent) than any other region.
"Unusually, higher risk appetite has been accompanied by a dramatic downsizing in asset allocation to emerging markets, as surging global growth expectations have increased the value attractions of developed market alternatives," says Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
"The surge in equity and commodity weightings, uber-low cash levels, rising inflation expectations and crashing EM allocations indicate that we are no longer in a Goldilocks environment. A jump in rates or weaker growth are the most likely catalysts for a spring correction," says Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research.
Greater Conviction in U.S. Rate Rise in Next 12 Months
Investors remain confident in the global economy and corporate profits, even though their expectation of a future increase in U.S. interest rates has moved forward. A net 70 percent now see the Federal Reserve raising rates in the next year, compared to January's net 62 percent. This marks the first time in a year that respondents have accelerated their timetable for higher U.S. rates.
Eighty-six percent of fund managers see short-term interest higher in 12 months' time. This represents a 19-point rise since December. An increasing majority expects global inflation to increase this year - a net 75 percent in February, up from a net 48 percent three months ago.
Nonetheless, a net 58 percent of investors expect the world's economy to strengthen in 2011, a three-point rise from last month. This should be reflected in corporate profits, which a net 68 percent anticipates rising 10 percent or more this year - up from 57 percent and 45 percent in January and December, respectively.
An important component of inflation, commodity prices, now ranks as the biggest risk that investors identify. A net 33 percent rank it ahead of all other threats, up from a net 13 percent in January. This is reflected in their more negative outlook for corporate profit margins. A net 2 percent now say operating margins will fall in the next 12 months, compared to a net 10 percent who saw this measure improving over the same timescale last month.
At the same time, a growing number of fund managers are seeking to benefit from rising commodity prices. A net 28 percent are now overweighting the asset class, up from a net 16 percent a month earlier.
Strong sector shifts reflect risk appetite
Fund managers' greater risk appetite is reflected in their very strong rotation between equity sectors. While increasing their overweight stance on technology shares (up to a net 51 percent, from a net 39 percent in January), they report notably greater confidence in financials and lower appetite for defensive stocks. Underweights in banks and insurers fell to a net 7 percent each, down from January's respective net 21 percent and a net 15 percent. In contrast, they turned negative on pharmaceuticals (net 4 percent underweight, from a net 12 percent overweight a month earlier). Negative stances on consumer discretionary, consumer staples and utilities all intensified as well.
Clear regional differences underlie these global shifts. With EU sovereign funding no longer so pronounced a concern as in January, European respondents trimmed their underweight on banks by as much as 40 points - from a net 56 percent to a net 16 percent. In contrast, U.S. investors are more negative towards the sector this month.
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