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Institutional Investors Gain Confidence and Optimism

By Hal M. Bundrick

NEW YORK ( MainStreet) -- Market optimism is at its highest in nearly four years as a clear majority (72%) of global money managers expresses confidence that the world's economy will expand over the next 12 months. As a result, institutional investors are overweighting equities, to a net 56%, according to the BofA Merrill Lynch Fund Manager Survey for August.

The well documented rotation from bonds continues, as investors positioned bonds to a firm underweight, at a net 57%. Cash holdings are still allocated at a healthy 4.5%.

"While global growth expectations have risen very rapidly, the good news is that cash levels remain high," says Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. "Out-of-favor emerging markets offer some enticing opportunities to deploy these balances."

A total of 229 global money managers with $671 billion of assets under management participated in the survey.

Fear of a "hard landing" in China is still a concern as more than half of the panel identifies this threat as the biggest risk for markets and economies, though that worry has eased a bit from last month's survey. Nearly a third of investors (32%) expect China's economic growth to be weaker, a substantial improvement from 65% expecting the same last month.

Meanwhile, expectations for the eurozone have improved notably.

"The current earnings season shows global recovery reflected in European companies' performance," says John Bilton, European investment strategist. "With the eurozone the most undervalued major market by far, optimism on the region's equities should be sustained."

Emerging markets remain in the penalty box as money managers reported a 19% underweight in the asset class, the lowest level recorded in the survey in nearly two years, though more than three-quarters of specialist fund managers view global emerging market equities as undervalued. Korea has seen a spike in interest, though. Global emerging market specialists now rank the market one of their top picks, along with China and Russia.

--Written by Hal M. Bundrick for MainStreet

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