QE2 news has expanded risk appetite: Survey

NEW YORK & LONDON--(BUSINESS WIRE)--Investors embraced riskier assets, notably equities and commodities, after the resumption of quantitative easing (QE) but a correction could be nearing, according to the BofA Merrill Lynch Survey of Fund Managers for November.

A net 35 percent of investors see the global economy strengthening in the next year, compared to 15 percent a month earlier. A net 41 percent anticipate corporate profits rising by 10 percent or more in the same period. This constructive outlook has left a net 41 percent of fund managers overweight equities, up from 27 percent in October. Their investment strategies have now risen to a normal level of risk-taking, compared to a net 33 percent reporting below-normal stances as recently as September.

While QE and positive macroeconomic data have bolstered the growth outlook, with the exceptions of China and Europe, the survey also reveals increased concern over inflation and warning signs of a potential near-term market correction. The number of global investors overweight cash has reached a seven-year low as more focus on the near term. A net 30 percent say their investment time horizon is shorter than normal, up from 25 percent a month ago.

“Following QE2, we have witnessed a capitulation into risk assets to a degree that history suggests should prompt concern. Cash holdings, especially, are dangerously low at 3.5 percent of portfolios,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.

“It’s possible that the year-end rally has already happened, leaving investors vulnerable to event risk such as a deepening European sovereign debt crisis or a dollar rally,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research.

Allocating assets to ride inflation expectations

Investors and asset allocators have headed into positions that take advantage of and protect against higher inflation. November’s survey shows significant shifts into equities and commodities.

The proportion of investors expecting inflation to rise in the next 12 months has spiked to a net 48 percent, up from a net 27 percent in October. A net 45 percent believe that global monetary policy is “too stimulative,” after the second round of quantitative easing by the U.S. Federal Reserve.

A net 41 percent of asset allocators were overweight equities this month, up from a net 27 percent in October and a climb of 31 percent since September.

Allocations to global emerging market equities (GEM) have continued to rise and this month reached their highest level in nearly seven years. A net 56 percent of the panel is overweight GEM, up from a net 32 percent just two months ago.

Commodities have also grown in popularity with a net 21 percent of asset allocators overweight the asset class, compared with 17 percent a month ago. Investors have also increased their equity allocation to Basic Materials stocks with a net 21 percent overweight the sector, up from a net 9 percent in October.

In contrast, allocations to bonds slipped further with a net 36 percent of the panel underweight bonds in November, up from a net 24 percent in October.

Sovereign worries dampen European outlook

More than a third of global investors have identified EU sovereign funding as their key risk. Concern about the public finances of several EU states is reflected in a cautious outlook for the European economy. A net 23 percent of European respondents expect the region’s economy to strengthen in the coming 12 months. This represents a more muted pickup in outlook than elsewhere except China, where a net 16 percent of respondents now expect a stronger economy, down from October’s 19 percent.

Overweight positions in eurozone stocks increased in November to a net 15 percent of investors, up from October’s net 3 percent. But the proportion of investors who name the region as their top pick for underweighting in the next year also rose to a net 12 percent.

“As concern about EU sovereign debt risk grows, European investors are focusing on growth drivers outside the region,” said Patrik Schowitz, European equities strategist. “Investors’ highest equity allocations are to resources and exporting sectors such as technology and industrials.”

Survey of Fund Managers

A total of 218 fund managers, managing a total of US$634 billion, participated in the global survey from 5 November to 11 November. A total of 170 managers, managing US$419 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS. Through its international network in more than 50 countries, TNS provides market information services in over 80 countries to national and multi-national organizations. It is ranked as the fourth-largest market information group in the world.

The BofA Merrill Lynch Global Research franchise covers over 3,100 stocks globally and ranks in the top tier in many external surveys. Most recently, the group was named 2010 Top Global Broker (second consecutive year), Top Europe Broker, No. 2 U.S. Broker and No. 3 Asia broker by Financial Times/StarMine. The team was also named Best Brokerage by Forbes/Zacks for the second consecutive year.

In addition, the group was named No. 1 in the 2010 Institutional Investor All-Emerging Europe and All-Latin America Research team surveys and No. 3 in the 2010 Institutional Investor All-America Equity, All-Fixed Income and All-Europe Research team surveys. The group was also the winner of Emerging Markets’ EM Research Global Award for 2010.

Bank of America

Bank of America is one of the world's largest financial institutions, serving individual consumers, small- and middle-market businesses and large corporations with a full range of banking, investing, asset management and other financial and risk management products and services. The company provides unmatched convenience in the United States, serving approximately 57 million consumer and small business relationships with approximately 5,900 retail banking offices and approximately 18,000 ATMs and award-winning online banking with 29 million active users. Bank of America is among the world's leading wealth management companies and is a global leader in corporate and investment banking and trading across a broad range of asset classes, serving corporations, governments, institutions and individuals around the world. Bank of America offers industry-leading support to approximately 4 million small business owners through a suite of innovative, easy-to-use online products and services. The company serves clients through operations in more than 40 countries. Bank of America Corporation stock (NYSE: BAC) is a component of the Dow Jones Industrial Average and is listed on the New York Stock Exchange.

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