Bank of America-Merrill Lynch’s widely followed survey of fund managers, released this week, shows a bunch of true believers in the recovery and shares.
A majority of managers surveyed consider themselves overweight in equities, only 37% believe credit default risk to be “above normal” and a net 71% believe that corporate earnings will rise 10% or more in the next 12 months.
Inflation is not a worry and more managers see no rate rise in the US until next year (something Fed chairman, Ben Bernanke hinted at in Washington on Wednesday).
52% of the 197 survey respondents, who together manage about $US546 billion, said they are “overweight” stocks, in-line with January’s reading which was the highest level since July 2007.
Cash balances dropped to 3.5%.
“In four out of the past five occasions when cash fell to 3.5 percent, equities corrected about 7 percent in the following four weeks,” said Patrik Schowitz, an equity strategist at BofA Merrill Lynch.
The low cash levels could be a sign in the short term that the market may be a little overbought.
“These low cash levels have been a warning signal in the past. It does indicate a level of complacency,” Mr Schowitz was quoted as saying.
Risk appetite in April returned to January’s level of 46 which preceded a 9.2% drop for the MSCI World. Fund managers also reduced their underweight position in banks.
As an investment, Europe has become a region many managers are avoiding and they have instead been putting more money into Japanese shares,
As recently as five months ago investors regarded Europe as the most attractive play on global economic recovery.
"But with the Greek debt crisis Europe has become a no-go zone and asset allocators now view Japanese equities as a cleaner cyclical play," said Patrik Schowitz, European equity strategist at BofA Merrill Lynch Global Research, in a statement.
From a net underweight of Japan in February, 12% of global asset allocators are overweight those equities, while 18% are underweight euro-zone equities.
Along with this is a more positive outlook on Japanese companies–a small majority of managers believes Japan has the most favorable outlook of all regions.
The number of investors taking above-average risk in their portfolios reached the highest level since January 2006, with a sharp rise in respondents expecting "above-trend growth and below-trend inflation."
Inflationary fears remain subdued and 42% of respondents see no new rates from the Fed up to 2011, up from 38% last month.
"The findings are consistent with the view that the U.S. consumer, far from remaining in intensive care, is on the path back to good health," said Michael Hartnett, chief global equities strategist at BofA Merrill Lynch Global Research.
A net 71% of those surveyed believe corporate results will rise 10% or more over the next 12 months, up sharply from a net 53% in March.
A net 42% of respondents believe companies can increase operating margins in the next 12 months, up from 27% in March.
With that, respondents’ desire to see corporates increase capital spending is at its highest since June 2006, while the percentage of those seeing the need for balance sheet repair among companies is at a Jan. 28 low.
More asset allocators are overweight industrials and materials and at the same time.
One in six investors is now overweight banks, compared with one in 10 in March, the survey showed.
No wonder the Financial Times said many in the market were showing signs of "irrational equanimity".
