Global fund managers have entered 2013 brimming with optimism and have been pushing more money into equities and, specifically, banking stocks, according to the latest BofA Merrill Lynch Fund Manager Survey.
"The new year sees asset allocators assigning more funds to equities than at any time since February 2011, while their confidence in the world’s economic outlook has reached its most positive level since April 2010," stated the report from BofA Merrill Lynch Global Research.
Global fund managers now have four times the amount of money allocated to equities compared to the beginning of 2012, stated John Bilton, a European investment strategist at BofA Merrill Lynch.
Banks are Back
This is also the first time since 2007 that professional investors are reporting that they are "overweight" banking stocks in their portfolios.
"Investors had been underweight banks for the past 2,157 days, but no longer; that is perhaps the boldest message this month," stated the January report.
Investors are now moving into banking stocks because of constructive action and accommodative policies from central banks, said Bilton.
"A bet against the banks is a quasi-bet against the central banks," he said
Furthermore, plans for aggressive banking regulations were diluted, and that has helped fund managers feel more confident about the sector, he said.
Risk-On Attitude
The survey results show investors' appetite for risk is at its highest in nine years, while the number of investors who are hedging their bets and "taking out market protection" fell to the lowest level since the beginning of 2008.
Despite the optimism, the markets are not at a point of exuberance right now, says Bilton. Instead, he believes this return to optimism is simply a sign of market "normalisation".
Time for a Correction?
Cautious investors may be sceptical of this growing sense of optimism. BofA Merrill Lynch addressed those bearish investors by stating in the report: "Bullish sentiment does not guarantee a correction in risk assets ... but a January dip would be healthy and without one a larger correction later in Q1 becomes more likely."
Meanwhile, there are still some key economic and market risks that are troubling professional asset managers, including the US fiscal cliff, the sovereign debt problems in the eurozone and a potential "hard landing" in China. These three concerns topped the list of "tail risks", according to the survey.
The January survey by BofA Merrill Lynch compiled responses from 254 institutional investors who manage $754 billion in combined assets. The survey was conducted between January 4 to 10, 2013.
Which Banks are Undervalued?
For those individuals who are interested in taking a cue from global fund managers and investing more heavily in banking shares, it seems there are only a few banks that are being undervalued right now.
At the time of writing, the most undervalued bank is 
Western Union Company (WU), according to Morningstar analysts. This US-based bank currently has a five-star equity rating, which indicates that Morningstar analysts believe the market is significantly undervaluing the company.
In Europe, Morningstar analysts believe the most undervalued banking stock is Julius Baer Gruppe (BAER), which currently has a four-star equity rating.
"We’re optimistic about Baer’s acquisition of Merrill Lynch’s non-US wealth management operations, which we think will help the bank to build scale in fast-growing markets and lessen its dependence on Swiss offshore banking," said Morningstar analyst Jim Sinegal. "While Julius Baer may not enjoy the same worldwide name recognition as some of its Swiss competitors, we see that as an advantage—the private bank’s brand has been relatively untarnished by scandals or heavy losses during the financial crisis."
Morningstar's Star Ratings for equities are calculated based on what the current value of the shares are in the market versus what Morningstar analysts believe the fair value of the shares should be.
A high star rating, such as a 4- or 5-star rating, indicates that Morningstar believes the shares are very undervalued and this could be a time to buy in for cheap. Alternatively, if you see a stock with 3-stars that indicates the stock is being fairly valued by the market. Stocks with 1- or 2-star ratings are being overvalued by the market, according to Morningstar analysts.
Interested in the results from the December BofA Merrill Lynch Fund Manager Survey? Read, "Swelling Optimism Amongst Fund Managers".
