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Investors increasingly bullish as global economy regains growth path

Global investors have entered 2013 in buoyant but not yet exuberant mood, according to the BofA Merrill Lynch Fund Manager Survey for January.

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. 
Investors’ appetite for risk in their portfolios is now at its highest in nine years, while an increasing number judge equities as undervalued – particularly in Europe. Moreover, investors have reduced cash holdings to 3.8 per cent from 4.2 per cent in December. This marks the most positive reading of this measure of willingness to hold riskier investment assets since April 2011, though it has not reached levels that would represent a contrarian sell signal.
Participants’ perception of the US fiscal crisis as the biggest “tail risk” for asset markets has calmed (down nearly 20 percentage points in two months), though it remains their largest concern. Views of China remain very positive, with a net 63 per cent still anticipating a stronger economy this year, but one in seven sees a Chinese hard landing as their number one risk.
Investors’ bullishness reflects a growing confidence in economic recovery. A net 59 per cent now expect the global economy to strengthen this year, compared to a net 40 per cent a month ago. This marks the panel’s most positive outlook since April 2010. An increasing proportion of respondents expect inflation to pick up as well.
“Following the resolution of the US fiscal cliff, sentiment has surged. Half of investors now tell us that they would sell government bonds to buy higher-beta stocks, which is consistent with increasing growth and inflation expectations, and with our call for a ‘Great Rotation’ to start in 2013,” says Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

“While the survey reveals pockets of exuberance, undemanding valuations in Europe should underpin equities unless earnings growth fails to materialise,” adds John Bilton, European investment strategist.
Forty-nine per cent of respondents now expect government bonds to be sold to fund purchases of higher beta equities and sustain the “risk on” rally. Last month, in contrast, only 37 per cent saw the instrument as the likeliest source while 28 per cent expected this to be reduction of cash balances (now 22 per cent) and 19 per cent expected defensive equities (now 15 per cent).
In this environment, the perception of Italy as a substantial “tail risk” for Europe has declined sharply. Only 17 per cent of the panel now views the country as the biggest threat to the European story, compared to 26 per cent in December. Assessments of the threats from France and Spain have worsened from last month, however, up to 34 per cent and 29 per cent, respectively.
The panel has shifted its stance on financial stocks strongly, moving to its first net overweight in global bank names since February 2007 following a 15 percentage move versus last month. Nevertheless, banks are still perceived as the global equity market’s most undervalued sector. The existing overweight in insurance has also been extended, particularly in Europe, and now stands its highest level since January 2007.
In contrast, appetite for telecoms stocks has fallen to a net 25 per cent underweight. This marks the sector’s lowest weighting from asset allocators since December 2005. While still in positive territory, pharmaceuticals have declined to a net 11 per cent overweight. Their fall from a net 24 per cent last month is January’s largest sectoral move.
The perception that consumer staples companies are the most overvalued has also accelerated month-on-month.
The new Japanese government’s policies continue to improve the country’s outlook. Its growth composite indicator now stands at a striking reading of 96.
Against this background, global fund managers are turning more positive. A net three per cent are now overweight Japanese equities, a sharp reversal of last month’s net 20 per cent underweight. The proportion of investors viewing Japan as the most undervalued market increased this month as well, while a growing number see it as having the most favourable outlook for corporate profits.

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