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.
For the first time in more than three years, investors do not predict lower global economic growth over the next 12 months. 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 towards 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.
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 believe 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.
