BofA Merrill Lynch Fund Manager Survey Finds Risk Appetite at Four-Year High as Investors Embrace Equities

Portfolio Managers Urge Corporates to Step up Investment

Jan 19, 2010, 09:11 ET from BofA Merrill Lynch Research

NEW YORK and LONDON, Jan. 19 /PRNewswire/ -- Investors have rediscovered their risk appetite and are putting cash reserves to work across the equity markets, according to the BofA Merrill Lynch Survey of Fund Managers for January.

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For the first time since January 2006 the survey shows investors are taking above average risk, relative to their benchmark. A net 2 percent is taking "higher than normal" risk, compared with a net 7 percent taking "below normal risk" in December. These figures follow several months of investors displaying optimism about the economy but maintaining a more cautious risk and investment profile.

Average cash balances have fallen to 3.4 percent, the lowest reading since mid 2007 and down significantly from 4.0 percent in December. Appetite for equities is strong. A net 52 percent of asset allocators are overweight equities, up sharply from a net 37 percent in December.

Fewer investors are protecting themselves against a fall in equities. A net 55 percent have no protection against a fall in the next three months, compared with a net 48 percent in December. Investors have been moving into cyclical stocks, are positive about profits and are urging management teams to invest in growth.

"This survey is one of the more bullish we have seen and suggests that investors buy into the idea that this recovery has legs," said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research. "We are, however, seeing early signs that might alert contrarians looking for a selling opportunity – namely low cash allocations and possible complacency against a sell off in stocks," said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Global Research.

Capex more important than debt reduction, investors tell corporates

Investors responding to the BofA Merrill Lynch Survey of Fund Managers are urging companies to invest more in growth and less in balance sheet repair. For the first time since mid 2006, capital investment heads the list of investors' priorities – ahead of reducing debt and returning cash to shareholders.

Four out of ten respondents say that capital spending is what they most want to see corporates use their cash for. Improving the balance sheet, which has been investors' priority for the past year and a half, is now in second place.

A net 55 percent of the panel say that companies are currently under investing, up from a net 48 percent in December. They are also happy to see companies take on more debt. A net 15 percent of respondents take the view that corporate balance sheets are "under leveraged", up from a net 9 percent a month ago.

The desire to see greater investment in growth reflects how optimism about corporate earnings has pushed higher. A net 63 percent of global investors expect corporate earnings to increase by at least 10 percent over the next 12 months. This represents a significant month on month increase from a net 46 percent in December. Almost a third of the panel says the 10 percent rise is "very likely". The outlook for margins is also positive, with a net 40 percent of investors predicting that operating margins will improve.

Cyclicals and Japan back in favour

Portfolio managers have been showing signs of turning to "laggard" sectors and regions that they have shunned in recent months. Global asset allocators have consolidated positions in Technology and Energy but they have also increased exposure to Banks and Consumer Discretionary in the past month. The net percentage of respondents underweight banks has fallen to 16 percent from 37 percent. European respondents to the regional survey have become more bullish about Banks and also Automotives.

Japan is back in favour. Within Japan, optimism over the economy and earnings has picked up since November. A net 63 percent of the regional panel expects a stronger Japanese economy in 2010, up from 30 percent in November. A net 87 percent expect improved earnings, up from 59 percent in November.

The global panel has identified Japanese equities as the most undervalued in the world and over the past two months Japanese equities have become more popular than eurozone equities. Japan is the region that 20 percent of the panel would most like to overweight in the coming year, versus 10 percent opting for Europe.

Survey of Fund Managers

A total of 209 fund managers, managing a total of US$539 billion, participated in the global survey from 8 January to 14 January. A total of 169 managers, managing US$404 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS. Through its international network in more than 50 countries, TNS provides market information services in over 80 countries to national and multi-national organizations. It is ranked as the fourth-largest market information group in the world.

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