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BofA Merrill Lynch Releases Fund Manager Survey

Investors see brighter corporate profits on horizon - shift from cash to equities, as double-dip recession fears fade

According to the BofA Merrill Lynch Survey of fund managers for October, investors’ risk appetite has reached its highest point in more than three years amid continued optimism about the prospects for a global economic recovery and rising corporate profits. A total of 229 fund managers, managing a total of $616 billion, participated in the global survey from 2 October to 8 October. A total of 195 managers, managing $384 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Global Research with the help of market research company TNS.

Investors are increasingly confident that the threat of a double-dip recession is waning. A net 65% of respondents believe a global recession is unlikely in the next 12 months, up from 47% a month earlier. A net 72% of respondents believe the outlook for corporate profits will improve in the next year, up from 68% a month earlier.

The survey also showed that asset allocators shifting out of cash and into equities as risk appetite grows. Their cash positions are at their lowest level since January 2004. A net 7% of respondents are underweight cash in October, compared to 10% overweight a month earlier. A net 38% of panelists are overweight equities, up from 27% in September. Technology, Energy, Materials and Industrials are the favored sectors for asset allocators in October with investors still shying away from financial stocks.

Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research, said: “Equities remain in a sweet spot: fears of a double-dip have receded, while worries about inflation and monetary tightening are not imminent enough to prevent an October surge in risk appetite.”

The survey also revealed that asset allocators are showing a growing conviction that global corporate profits will post double digit earnings growth. A net 39% of panelists think profits will rise by at least 10% in the next 12 months, up from just 25% in September. A net 30% of global portfolio managers see Euro zone equities as undervalued relative to other regions, the highest reading since April 2001. This contrasts with Japan, which a net 20% of investors regard as the least attractive region a year ahead.

The change in sentiment coincides with a shift in investors’ appetite for European financials. Investors are overweight European banks for the first time since June 2007, courtesy of greater confidence in bank balance sheets and profitability trends. Gary Baker, head of European equity strategy at BofA Merrill Lynch Global Research, said: “Europe is emerging phoenix-like from the ashes as confidence in its banks boosts overall confidence in European equities.”

Confidence in the prospects for the Chinese economy and emerging markets in general remains robust. A net 49% of respondents think China’s economy will strengthen in the next 12 months, up from 35% in September. “Confidence in Chinese growth has rebounded but worries over a U.S. dollar crisis are on the rise. The dollar is seen as undervalued and the yen as very overvalued, suggesting that central bank intervention in currency markets in coming months could soon prove successful,” Mr. Hartnett added.