Global investors have started 2012 with a reawakened sense of optimism towards the global economy and greater appetite for risk, according to the BofA Merrill Lynch Survey of Fund Managers for January.
The global survey of 214 institutional investors managing $655 billion shows that over the period of just one month, far fewer are now predicting a global slowdown. Only a net 3% believe the world economy will weaken in the coming 12 months, down from a net 27% in December, which shows that New Year optimism has caused the largest one-month improvement in the growth outlook since May 2009.
As one might expect given the new found sanguine approach, many investors are showing more appetite to take on risk. BofA Merrill Lynch’s Composite Risk and Liquidity Indicator is the highest since July 2011, before the sovereign debt crisis fully emerged. Meanwhile, cash levels have fallen to their lowest levels since July 2011, with cash now making up 4.4% of a portfolio on average, versus 4.9% in December. The proportion of investors taking lower than normal levels of risk has improved to a net 33% of the panel, compared to a net 42% in December.
"Investors are tip-toeing rather than hurtling toward higher risk exposure," said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research. "The U.S. market and high quality cyclical sectors, such as energy and tech, have been the main beneficiaries of lower cash holdings."
Not all bright and cheery, however. One concern highlighted by the survey is geopolitical risk. The proportion of respondents viewing geopolitical risk as "above normal" jumped to 69% in January from 48% last month. Such a move has, in the past, been correlated with a spike in the oil price, the BofA Merrill Lynch report noted.
Homing in on equities, though fears of a global corporate profit slowdown still exist they have receded in the past month such that a net 21% of the panel still expects profits worldwide to deteriorate in 2012. This is markedly lower than the net 41% recorded in December's survey. However, within equity investments, the gulf between the U.S. and Europe as a preferred investment location remains, though the survey shows that some of the more wildly negative views towards Europe have eased. A net 56% of the global panel believes that the outlook for corporate profits is more favourable in the U.S. than any other region, up from a net 50% in December. Views towards investing in the single-currency union have hardly moved, which comes as little surprise given the ongoing turmoil surrounding the region's debt insecurity and political instability. A net 70% of survey respondents said the profit outlook for the eurozone is the least favourable of all regions.
Such sentiments are reflected in asset allocations. The institutional investors surveyed have further ramped up exposure to U.S. equities, with a net 28% overweight U.S. equities, while a net 31% remain underweight eurozone equities--an improvement from a net 35% a month ago but the second-worst reading on record.
"Despite improvement in global and European growth expectations asset allocators remain deeply sceptical towards European equities, especially banks," said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
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