Investors are at their most optimistic about the global economy since December 2005, according to the Merrill Lynch Survey of Fund Managers for March. However, the prolonged banking crisis seems to be stopping them from putting cash into equities.
Risk appetite in equities took a marked downward turn in March despite the improved economic outlook. Respondents say they have reduced their equity exposure in the past month while increasing cash holdings and fixed-income investments.
A net 41% of respondents are underweight equities, up from a net 34% in February. World equities fell by 15.5% during the days the survey took place. Investors appeared to have flooded into bonds with a net 26% of the panel overweight the assets class, up sharply from a net 7% the previous month. Average cash balances rose to 5.2% from 4.9 percent in February.
Signs of an early recovery phase have appeared, however. A net 42% of the panel believe equities are undervalued, up from a net 24% in February. Changes in sector allocation indicate a movement out of the most defensive stocks, such as in Pharmaceuticals – where a net 30% are now overweight the sector, down from a net 37% in February.
At the same time the panel has increased exposure to Technology, a much more cyclical industry. A net 28% of respondents are overweight the sector, up from a net 15% in February.
While the U.S. continues to fuel economic optimism, investors have become more bullish about emerging markets, especially China.
Respondents have taken a net overweight position in emerging markets equities for the first time since August 2008. A net 4% are overweight the sector compared with net 4% being underweight in February. At the same time, commodities have made further gains with the number of investors underweight the asset class falling to a net 6%, down from a net 25% in January.
A net 40% of respondents are now underweight eurozone equities and a net 39% are underweight Japanese equities.
“March’s survey shows signs that investors want to believe in an economic recovery. However, caution on banks is firmly capping risk appetite,” says Gary Baker, Banc of America Securities-Merrill Lynch co-head of international investment strategy.
“How investors resolve this anomaly between growth optimism and risk reluctance will determine the fate of equity markets this spring,” says Michael Hartnett, Banc of America Securities-Merrill Lynch co-head of international investment strategy.
“Optimism on growth has been expressed with higher weightings in emerging markets equities and commodities,” says Michael Hartnett. “Investors might look to review their extreme underweight positions in eurozone and Japanese equities if economic data follow growth expectations higher.”
L.D.