Seeing Brighter Corporate Profits Ahead, Investors Shift from Cash to Equities

Investors’ risk appetite has reached its highest point in more than three years amid continued optimism about the prospects for a global economic recovery and rising corporate profits, according to the BofA Merrill Lynch Survey of Fund Managers for October.
 
Investors are increasingly confident that the threat of a double-dip recession is waning. A net 65% of respondents believe a global recession is unlikely in the next 12 months, up from 47% a month earlier. A net 72% of respondents believe the outlook for corporate profits will improve in the next year, up from 68% a month earlier.
 
The survey also shows asset allocators shifting out of cash and into equities as risk appetite grows. Their cash positions are at their lowest level since January 2004. A net 7% of respondents are underweight cash in October, compared to a net 10% overweight a month earlier. A net 38% of panelists are overweight equities, up from 27% in September. Technology, Energy, Materials and Industrials are the favored sectors for asset allocators in October with investors still shying away from financial stocks.
 
“Equities remain in a sweet spot: fears of a double-dip have receded, while worries about inflation and monetary tightening are not imminent enough to prevent an October surge in risk appetite,” said Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.

Investors seeing value in Europe hits eight-year high
 
Asset allocators are showing a growing conviction that global corporate profits will post double digit earnings growth, the survey shows. A net 39% of panelists think profits will rise by at least 10% in the next 12 months, up from just 25% in September.
 
Optimism about Europe is pronounced in the October survey. A net 30% of global portfolio managers see eurozone equities as undervalued relative to other regions, the highest reading since April 2001. A net 9% of panelists want to overweight the region in the next 12 months, up from 7% last month. This contrasts with Japan, which a net 20% of investors regard as the least attractive region a year ahead.
 
Meanwhile, confidence in the prospects for the Chinese economy and emerging markets in general remains robust. A net 49% of respondents think China’s economy will strengthen in the next 12 months, up from 35% in September. A net 36% of respondents also said they would most like to overweight emerging markets in the next year.
 
Continuing weakness in the U.S. dollar has resulted in a growing number of respondents who believe the dollar is undervalued. A net 20% of panelists regard the currency as undervalued, compared to one% a month earlier. Japan’s economic outlook is marked by a growing number of asset allocators who view the yen as overvalued. A net 34% of respondents believe it is overvalued, compared to just 21% last month.   
 
“Confidence in Chinese growth has rebounded but worries over a U.S. dollar crisis are on the rise. The dollar is seen as undervalued and the yen as very overvalued, suggesting that central bank intervention in currency markets in coming months could soon prove successful," said Michael Hartnett.
 
A total of 229 fund managers, managing a total of US$616 billion, participated in the global survey from 2 October to 8 October. A total of 195 managers, managing US$384 billion, participated in the regional surveys.

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