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Risk Appetite On Rise Among Investors: Bank of America Merrill Lynch Fund Manager Survey

The number of investors taking above normal risk in their portfolio is at its highest since January 2006 and investors are more bullish about the ability of companies to increase profitability, according to Bank of America (BofA) Merrill Lynch Fund Manager Survey.

A total of 197 fund managers, managing a total of $546bn, participated in the global survey from April 1 to April 8. A total of 161 managers, managing $359bn, participated in the regional surveys.

According to the survey, which was conducted by BofA Merrill Lynch Research with the help of market research company TNS, a net 71% of the panel believes that corporate earnings would rise 10% or more over the next 12 months, up sharply from a net 53% in March. A net 42% of respondents believe that corporates can grow their operating margins in the next 12 months, up from a net 27% in March.

The number of respondents predicting above-trend growth and below-trend inflation has risen to 32% from 21% in March, the highest reading since the question first appeared in February 2008. However, inflationary fears remain subdued and 42% of respondents expect no interest rate hike from the Fed before 2011, up from 38% last month.

Moreover, average cash balances of a portfolio has decreased to 3.5% from 3.8% in March. A net 52% of the panel is overweight equities, up from a net 33% in February, and back to the level seen in January. Within equities, investors decreased their positions in banks and increased exposure to cyclical stocks, with a net 27% of asset allocators are overweight industrials’, up from 20% the previous month, and the percentage of allocators overweight materials rose to 18% from 12%.

However, a net 10% of respondents remain underweight banks this month, down from a net 24% in March. One in six investors is now overweight banks, compared with one in 10 in March.

A net 25% of the panel said that payout ratios (including dividends and share buybacks) are too low, up from a net 20% in March and the highest reading since August 2007. Respondents’ desire to see corporates increase capital spending is at its highest since June 2006, with 43% of the panel identifying it as their priority. Just 23% of the panel views debt reduction as a priority, the lowest since January 2008.

Michael Hartnett, chief global equities strategist at BofA Merrill Lynch Global Research, said: “April’s survey shows a growing number of investors envisaging a Goldilocks scenario of above trend growth and benign inflation. The findings are consistent with the view that the US consumer, far from remaining in intensive care, is on the path back to good health.”

Japanese investors’ benefited from their aversion to the eurozone, as questions surrounding Greek government debt intensified. A net 12% of global asset allocators are overweight Japanese equities, the highest level since July 2007. In February asset allocators were net underweight Japan. A net 18% of the panel is underweight eurozone equities.

Investors are positive about the outlook for Japanese corporates. As a small majority (net 3%) of the global panel opined that the Japanese companies have the most favorable outlook of all regions. That was previously a minority view (a net negative 4% in March).

Patrik Schowitz, european equity strategist at BofA Merrill Lynch Global Research, said: “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.”