Investors are showing renewed confidence in the markets and have been piling into equities over the last month, according to a new BofA Merrill Lynch survey of fund managers in February.
Institutional investors have begun focusing on investing more heavily in equities and are particularly heavyweight in cyclical stocks, including companies in the industrials and materials sectors. Meanwhile, asset allocations towards defensive stocks, such as pharmaceuticals and telecoms, have fallen.
“The strongest indication of risk appetite is investors’ definitive move into cyclicals from defensive stocks,” said Gary Baker, European equity strategist at BofA Merrill Lynch. Currently, the market is experiencing a “normalisation of risk appetite” following months of cautious investment moves, he said. But don’t begin to think that investors are getting ahead of themselves and taking on too much risk. “There’s not wild exuberance and massive risk appetite out there,” said Baker.
Global Emerging Markets are Gaining Lost Ground
Interest in emerging markets is also growing. Forty-four percent of global asset managers who took part in the survey said they are now overweight in emerging market equities, up from just 20% in the previous month. This surge of investor interest in emerging markets was the largest month-over-month jump since late 2011, making global emerging markets the favoured region amongst professional investors. Emerging market equities are known to produce higher returns for investors because emerging economies have higher growth rates than developed economies. However, they are also viewed as riskier assets.
The mass move by asset managers into equities comes after various economic data reports showed improvements in the overall global economy, said Baker.
“Improved liquidity has aided this [recent market] rally, but it’s important to emphasise that it also reflects improving economic sentiment. Hard economic data has to continue improving to sustain a recovery,” said Michael Hartnett, chief global equity strategist at the bank.
The global survey compiled responses from 202 institutional investors who manage over $600 billion in combined assets.
Results from the previous BofA Merrill Lynch survey from January can be found here.
