Asset allocators’ confidence in the global economic outlook is at its most positive level since April 2010, and they are assigning more funds to equities than at any time since February 2011, the survey of 254 panelists with $754 billion of assets under management showed.
Expectations that government bonds will be sold to fund purchases of higher beta equities, thus sustaining the “risk-on” rally, have increased to 49% of respondents compared with 37% last month.
The perception of Italy as a substantial “tail risk” for Europe declined sharply, with 17% of respondents now seeing it as the biggest threat to Europe, down from 26% in December. But views on the threats from France and Spain worsened, with 34% seeing France as the biggest threat and 29% opting for Spain.
“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,” Bank of America Merrill Lynch said in a statement accompanying the release of the survey’s results.
“Moreover, investors have reduced cash holdings to 3.8% from 4.2% 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,” it said.
Since the temporary resolution of the US “fiscal cliff” earlier this month, respondents’ perception of the US fiscal crisis as the biggest tail risk for markets fell nearly 20 percentage points, but the issue remains their biggest concern.
‘STUBBORNLY BULLISH’ ON EMERGING MARKETS
On China, a net 63% of respondents anticipate a stronger economy this year, but one in 7 considers a Chinese hard landing as the number one risk.
The percentage of those who expect the global economy to strengthen has increased sharply, to 59% this month from 40% in December. “This marks the panel’s most positive outlook since April 2010. An increasing proportion of respondents expect inflation to pick up as well,” Bank of America Merrill Lynch said.
But perhaps “the boldest message this month” is the fact that investors are overweight global banks for the first time since February 2007, the bank said.
Investors remained “stubbornly bullish” on emerging markets, with allocation increasing to 40% from 38%, were most overweight eurozone equities since January 2008 (by 15%) and raised Japan to 3% overweight for the first time since July 2011.
The survey also showed a big shift to cyclical stocks, with technology and industrials “the word’s favourite sectors,” and away from defensive stocks – the weighting in the telecom sector fell to its lowest since December 2005.