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 percent from 4.2 percent 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 U.S. 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 percent 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 percent now expect the global economy to strengthen this year, compared to a net 40 percent 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 U.S. 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,” said 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 materialize,” added John Bilton, European investment strategist.