Fund Manager Survey Reports Decline in Bearish Sentiment as Risk Appetite Improves

The August BofA Merrill Lynch Fund Manager Survey sees investors moving into Europe and out of Japan and the U.S.

The survey found a net 5% of respondents predicting that the global economy will improve in the next year, showing a modest turnaround from July when a net 12% expected the world economy would deteriorate. An indicator that tracks investors’ risk and liquidity conditions returned to an almost neutral reading this month, showing an improvement in sentiment. 

While the percentage of respondents expecting below-trend growth and inflation remained unchanged at 73%, the survey shows recession fears have eased in favor of inflation concerns. Down from 12% last month, only 1% of respondents expect inflation to decrease in the next twelve months.  

A net 14% of asset allocators indicated that global monetary policy is too stimulative, up from 5% in July. Still, 55% of respondents to the global survey do not anticipate any rate hike in the U.S. before the third quarter of 2011. 

Banks also saw improvement, going from last month’s 28% to 19% underweight in August. This ranked alongside industrials as the biggest sector shift by investors, but utilities and pharmaceuticals suffered steep declines in support. 

Increased Appetite for European Equities, Decreased Boorish Sentiment on China 

Allocation to bonds decreased this month in favor of allocation to equities. European equities saw an increase in demand, while investors limited their exposure to U.S. and Japanese equities. 

Eurozone equities saw a strong uptick from a net 10% underweight last month to a net 11% overweight in August. U.S. equities experienced a sharp drop from 7% overweight in July to 14% underweight in August. Japanese equities reached a net 27% underweight in August, compared to a net 7% in June.  

The survey found asset allocators think the U.S. dollar appears undervalued, a net 23% up from 3% in July. The Japanese yen, on the other hand, which 55% saw as overvalued in July, is up to a net 62% in this month’s report.   

Asset allocators continue to reduce their cash holdings. The survey found a net 7% overweight cash in August, down from 13% in July and 19% in June. In contrast, a net 9% of respondents were overweight commodities in August, up from a net 1% underweight in July.  

Global Emerging Markets (GEM) increased in popularity as concerns about a weakening of the Chinese economy waned. A net 38% of global asset allocators are overweight GEM equities, up from 34% in July and 31% in June. Expectations of the Chinese economy to weaken in the next year are down to a net 19% from 39% last month.