Global investors appear to be coming to terms with the prospect of a default by the Greek government, according to the BofA Merrill Lynch Survey of Fund Managers for October.
More than nine out of 10 (92 percent) of the 199 respondents to October's global survey believe that Greece cannot avoid default. Seven out of 10 respondents predict a default by April 2012.
Despite this overwhelming consensus, investors are less worried about sovereign risk than a month ago and less pessimistic about global growth.
EU sovereign debt funding remains the biggest tail risk in investors' minds, but concern has fallen from September's highs. While 68 percent of respondents considered it their number one concern last month, only 61 percent take that view in October.
The survey also suggests that the outlook for growth has stabilized and fears of global recession have receded. The proportion of the panel expecting a global recession in the coming 12 months has fallen to a net 25 percent from a net 40 percent in September. A net 15 percent of the global panel believes growth will weaken in the coming year, down from a net 17 percent in September.
"The survey shows investor consensus has priced in, or hopes for, an orderly default by Greece," says Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Research.
"Europe appears back from the brink. But it seems investors are waiting for the all clear from both Europe and emerging markets before committing cash," says Gary Baker, head of European Equities strategy at BofA Merrill Lynch Research.
Europe Back From the Brink
A month ago, the world was shunning Europe's markets, but global negativity towards the region has eased. A net 7 percent of the panel says that the eurozone is the region they would most like to underweight in the coming 12 months, down from a net 40 percent in September. More investors (a net 8 percent) would most like to underweight Japan in the coming year.
A net 29 percent of asset allocators are currently underweight eurozone equities, down from a net 38 percent in September. Sentiment towards the U.K. has also improved. While a net 26 percent were underweight U.K. equities a month ago, that figure fell to a net 12 percent in October.
Within Europe, however, investors have become more concerned about the macro economic outlook. A net 37 percent of respondents to the European regional survey expect a recession in the coming 12 months, up from a net 11 percent a month ago.
High Cash Levels
While some indicators show sentiment improving this month, risk aversion remains at or close to September's highs. Average cash balances have increased month on month to 5 percent of portfolios, up from 4.9 percent in September. A net 39 percent of asset allocators are overweight cash (36 percent a month ago).
A net 7 percent of asset allocators are underweight equities, more than September's level of 5 percent. Emerging market equities has seen a steep fall in popularity. Only net 9 percent of asset allocators say they are overweight emerging market equities in October, compared with a net 30 percent in September.
A net 47 percent of regional fund managers predict China's economy will weaken in the coming year, up from 30 percent last month. The panel has also moved slightly underweight commodities having been slightly overweight in September.
Technology: The Last Cyclical Outpost
With emerging markets and commodities losing favor this month, only one cyclical investment remains popular. Technology retains its position as the world's favorite sector. Pharmaceuticals and staples, more defensive investments, stand at two and three respectively.
Allocations to technology increased month on month. A net 39 percent of the panel is overweight the sector, up from a net 35 percent in September.
A second sign that risk appetite might be stirring among some investors is that bearishness towards banks has fallen sharply. A net 34 percent the global panel is underweight banks this month, down from a net 47 percent in September.
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