Risk appetite spurs emerging markets rush

Johannesburg - Investors are channelling most of their renewed risk appetite into global emerging market equities in the wake of an expected second wave of quantitative easing, according to the Bank of America (BofA) Merrill Lynch Survey of Fund Managers for October.

The level of risk investors are taking in their portfolios rose more sharply than in any month since April 2009.
 
Hedge funds continued to add to their net equity exposure. The proportion of asset allocators' overweight equities nearly tripled to a net 27% from a net 10% in September, while they extended underweight positions in bonds.

The proportion of portfolio managers' overweight cash fell to a net 6% from a net 18%. The vast majority of this movement into equities was into global emerging market equities. A net 49% of asset allocators are overweight global emerging market equities, a monthly rise of 17 percentage points.

Appetite for US, eurozone and Japanese equities remained stable while the panel became less bearish about the UK.
 
Portfolio managers are more optimistic about China's growth over the coming year. A net 19% expects China's economy to strengthen in the next 12 months, up from a net 11% in September and 38 percentage points above August's level.
 
"European stocks, especially in cyclical sectors, are riding on the coat-tails of QE (quantitative easing) expectations with as yet no sign of a pick-up in underlying macro fundamentals," said Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research.

"While improved risk appetite is to be welcomed, one proviso is just how narrow the investor focus on Gem (global emerging market equities) is at this point," said Michael Hartnett, chief global equities strategist at BofA Merrill Lynch Global Research.

As well as the dramatic moves into emerging markets, evidence of a broader pick-up in risk appetite is apparent in October's survey. Demand for commodity exposure recovered with a net 17% of the panel overweight in October, compared with a net 4% the previous month.

Asset allocators shifted from their defensive sector positions of September back towards cyclical and growth stocks. A net 25% of the panel is underweight Utilities, up from 11% a month earlier.

The biggest gains were in industrials, materials and technology. A net 15% of asset allocators are overweight industrials in October, up 11 percentage points.
 
Investors are more bullish about the outlook for corporate profits, and want to see chief financial officers take a more aggressive stance by investing more in their businesses, returning surplus cash to shareholders and adding debt.
 
A net 41% and 43% would like to see companies pay out surplus cash (or make acquisitions) and raise more debt, up from a respective 34% and 35% the previous month. The proportion of investors wanting companies to prioritise balance sheet repair nearly halved month-on-month, falling to a net 11%.

Gold seen as overvalued

A net 11% of the panel said profits would improve over the next 12 months, up from a net 2% in September.
         
October's survey shows an absence of strong conviction among investors towards US or eurozone equities. A net 4% are underweight the US, a net 3% are overweight the eurozone and investors have also moved to a neutral position in UK equities from being underweight in September.

In contrast, asset allocators moved even more underweight Japan.
 
These positions reflect notable uncertainty over the direction of the dollar and the euro. While growing numbers of investors believe the US dollar is undervalued, the prospect of quantitative easing in the US is countering potential dollar appetite and raising expectations of inflation.
 
The proportion of investors predicting higher global inflation jumped to a net 27% from a net 9% in September.
 
A net 45% of fund managers now regard the dollar as undervalued (up from a net 18% last month), and the same proportion see the euro as overvalued. But only a net 12% of the panel expects the dollar to gain against a basket of key currencies over the next 12 months.
 
Gold, propelled to new highs by its safe haven status, is viewed as overvalued by a net 24% of the panel, double the level of two months ago.
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