Bullish Behavior towards Global Equities at New Highs

A net 67% of asset allocators said they are overweight global equities, the highest reading since the survey began asking this question in April 2001. BofA says this represents a significant increase from January and December when a net 55% and 40% were overweight, respectively. At the same time, the survey found bond and cash allocations continued to fall. A net 66% is underweight bonds, up from a net 54% from a month ago, while a net 9% is underweight cash–the lowest allocation since January 2002. The difference between equity overweights and bond underweights has also reached its highest level since the survey began.

BofA Merrill Lynch found an “unusual shift” in regional allocations along with the increased risk appetite. Only a net 5% of fund managers are now overweight global emerging markets equities, down from January’s net 43%. This represents the steepest monthly decline in emerging market exposure in the survey’s history and compares with the net 28% average weighting since this question was introduced.

In contrast, investors are reportimg more positive stances on key developed markets, according to the survey. Appetite for Eurozone equities has increased significantly – a net 11% overweight in February, compared to a net 9% underweight in January. A net 34% of respondents are overweight U.S. equities, up from a net 27% and 16% in January and December, respectively. Moreover, the U.S. and Eurozone now rank as the two regions investors would most like to overweight going forward. Yet a month ago, more respondents wanted to underweight Eurozone equities (a net 17%) than any other region.

“Unusually, higher risk appetite has been accompanied by a dramatic downsizing in asset allocation to emerging markets, as surging global growth expectations have increased the value attractions of developed market alternatives,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.

More believe U.S. rate will rise in next 12 months  

BofA Merrill Lynch also asked investors about the likelihood of a future increase in U.S. interest rates. A net 70% see the Federal Reserve raising rates in the next year, compared to January’s net 62%. This marks the first time in a year that respondents have accelerated their timetable for higher U.S. rates.

Eighty-six percent of fund managers see short-term interest higher in 12 months’ time. This represents a 19-point rise since December. An increasing majority expects global inflation to increase this year–a net 75% in February, up from a net 48% three months ago, the survey found.

An important component of inflation, commodity prices, now ranks as the biggest risk that investors identify. Thirty-three percent rank it ahead of all other threats, up from 13% in January. Two percent say operating margins will fall in the next 12 months, compared to 10% who saw this measure improving over the same timescale last month.

At the same time, a growing number of fund managers are seeking to benefit from rising commodity prices. Twenty-eight percent are overweighting the asset class, up from 16% a month earlier.

Strong sector shifts reflect risk appetite  

Fund managers’ greater risk appetite is reflected in their very strong rotation between equity sectors, BofA Merrill Lynch asserted. While increasing their overweight stance on technology shares (up to 51%, from 39% in January), they report notably greater confidence in financials and lower appetite for defensive stocks. Underweights in banks and insurers fell to 7% each, down from January’s respective 21% and 15%. In contrast, they turned against pharmaceuticals (4% underweight, from 12% overweight a month earlier). Negative stances on consumer discretionary, consumer staples and utilities all intensified as well.

A total of 188 fund managers, managing a total of $569 billion, participated in the global survey from February 4-10. A total of 154 managers, managing $384 billion, participated in the regional surveys.