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BofA Merrill Lynch fund manager survey finds gloom lifting over global growth prospects

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 shows far fewer predicting a global slowdown. Only a net 3 per cent believe the world economy will weaken in the coming 12 months down from a net 27 per cent in December – the biggest one-month improvement in the growth outlook since May 2009.
Many investors are showing more appetite to take risk. BofA Merrill Lynch’s Composite Risk and Liquidity Indicator is the highest since July 2011, before the sovereign debt crisis fully emerged. Cash levels have fallen to their lowest levels since July 2011. Cash now makes up, on average, 4.4 per cent of a portfolio, down from 4.9 per cent in December. The proportion of investors taking lower than normal levels of risk has improved to a net 33 per cent of the panel, compared to a net 42 per cent in December.
One concern that investors have highlighted is geopolitical risk. The proportion of respondents viewing geopolitical risk as “above normal” has jumped to 69 per cent from 48 per cent last month. This has, in the past, been correlated with a spike in the oil price.
“Investors are tip-toeing rather than hurtling toward higher risk exposure; the US market and high quality cyclical sectors, such as energy and tech, have been the main beneficiaries of lower cash holdings,” says Michael Hartnett (pictured), chief Global Equity strategist at BofA Merrill Lynch Global Research. “Despite improvement in global and European growth expectations asset allocators remain deeply skeptical towards European equities, especially banks,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
Fears of a global corporate profit slowdown still exist but have receded in the past month. While a net 21 per cent of the panel still expects profits worldwide to deteriorate in 2012, that’s sharply lower than the net 41 per cent taking the view in December. The proportion of the panel expecting corporate earnings growth to be under 10 per cent has fallen to a net 42 per cent from a net 60 per cent.
Investors are returning to the view that corporate need to invest more. A net 55 per cent of respondents say that corporates are under investing, the highest reading in 10 months. A net 37 per cent of the panel believes that corporate are “under leveraged,” up from a net 31 per cent in December.
The gulf between the US and Europe as a preferred investment location remains, although some of the more wildly negative views towards Europe have eased. A net 56 per cent of the global panel believes that the outlook for corporate profits is more favourable in the US than any other region, up from a net 50 per cent in December. A net 70 per cent say the profit outlook for the Eurozone is the least favourable of all regions, compared with a net 72 per cent a month ago.
Asset allocators have further increased their exposure to US equities. A net 28 per cent are overweight US equities, up from a net 23 per cent in December. A net 31 per cent remain underweight eurozone equities, an improvement from a net 35 per cent a month ago but the second-worst reading on record. 
Technology has regained its status as the most favored global sector, highlighting the uptick in risk appetite after the defensive positioning at the end of 2011. The net per centage of investors overweight technology rose to 39 from a net 31 per cent in December, overtaking Pharmaceuticals.
US fund managers are returning to banks while Europeans continue to reject them. The proportion of US fund managers underweight banks has fallen to a net 16 per cent from 32 per cent last month. European fund managers have extended their underweights – a net 50 per cent are underweight banks.
Hedge Funds reduced their leverage this month to the lowest level since August 2010. The weighted average ratio of gross asset to capital has fallen to 1.22 from 1.41 in December. This fall follows six months in which leverage had remained high in spite of wider market volatility.


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