Investor attitudes have brightened about the outlook as the global markets have their best 10 days of trading since last November.
But that’s not necessarily leading to more share buying.
The health of banks remains the major concern (as we have been emphasising now for over a year).
In its monthly survey of investment attitudes among the world’s largest investors, Merrill Lynch found that they are at their most optimistic about the global economy since December 2005.
But the Merrill Lynch Survey of Fund Managers for March found the prolonged banking crisis seems to be stopping them from putting cash into equities.
Merrill Lynch said the survey found that for the first time in more than three years, investors do not predict lower global economic growth over the next 12 months.
ML said renewed optimism about China’s economy lies at the heart of this revival.
Just two months ago, a net 70 percent of respondents thought China’s economy would worsen in the year ahead. That figure fell to a net 1 percent this month.
At the same time, risk appetite has dropped with investor pessimism toward banks at a record high.
A net 48 percent of asset allocators said they are underweight banks this month, up from a net 39 percent in February.
A total of 22 percent said they are aggressively underweight banks, versus 17 percent in February. Respondents are noticeably bearish about Japanese and eurozone equities.
"March’s survey shows signs that investors want to believe in an economic recovery. However, caution on banks is firmly capping risk appetite," said 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," said Michael Hartnett, Banc of America Securities-Merrill Lynch co-head of international investment strategy.
Out of Equities, Into Safe Havens
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 percent of respondents are underweight equities, up from a net 34 percent in February.
World equities fell by 15.5 percent during the days the survey took place.
Investors appeared to have flooded into bonds with a net 26 percent of the panel overweight the assets class, up sharply from a net 7 percent the previous month.
Average cash balances rose to 5.2 percent from 4.9 percent in February.
Signs of an early recovery phase have appeared, however.
A net 42 percent of the panel believes equities are undervalued, up from a net 24 percent in February.
Changes in sector allocation indicate a movement out of the most defensive stocks, such as in Pharmaceuticals — where a net 30 percent are now overweight the sector, down from a net 37 percent in February. At the same time, the panel has increased exposure to Technology, a much more cyclical industry.
A net 28 percent of respondents are overweight the sector, up from a net 15 percent in February.
BRIC Is Back but Eurozone and Japan Are Shunned
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 percent are overweight the sector compared with net 4 percent 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 percent, down from a net 25 percent in January.
"Optimism on growth has been expressed with higher weightings in emerging markets equities and commodities," Hartnett said.
In contrast, investors have further reduced equity investment in the eurozone and Japan.
"Investors might look to review their extreme underweight positions in eurozone and Japanese equities if economic data follow growth expectations higher," Hartnett said.
A net 40 percent of respondents are now underweight eurozone equities and a net 39 percents are underweight Japanese equities.
A total of 213 fund managers, managing a total of U.S. $US533 billion, participated in the global survey from March 6 to March 12.
A total of 183 managers, managing $US365 billion, participated in the regional surveys.
The survey was conducted by Banc of America Securities – Merrill Lynch Research with the help of market research company TNS.
Meanwhile Merrill Lynch Global Wealth Management says commodities and emerging market stocks and currencies are likely to lead any further rebound in markets.
In comments reported by Bloomberg this week ML said raw materials may benefit from production cutbacks and consumers running down stockpiles.
“Commodities should benefit from any improved outlook for the global economy, even if that means just the absence of downgrades to global gross domestic product numbers,” ML said in the report. “Our inclination is to advise clients to add to risk in portfolios.”
“There are a number of factors that need to be resolved before we can be certain that we have turned the corner.
“The U.S. housing market will have to bottom out and the pace of job losses abate before we can become more confident.”
On a global scale, we would like t
