Merrill Lynch Fund Manager Survey Finds Surge in Bullishness

Seven out of 10 investors predict the world economy will improve in the next 12 months, according to the Merrill Lynch Survey of Fund Managers for May.

The survey found that equities, while underweight, are becoming more popular, particularly for emerging markets and in cyclical sectors expected to perform best in the recovery. Average cash holdings have fallen to 4.3% from 4.9% in April.

“Investors are finally opening their wallets and reducing cash balances to mid-cycle levels to buy equities, cyclical stocks, and risky assets,’ said Michael Hartnett, Banc of America Securities-Merrill Lynch co-head of international investment strategy, in a release of the results. “However, this rush to take on risk, especially in emerging markets, is reminiscent of bubble-like behavior. A record net 40% of fund managers are looking to overweight the region in the next 12 months.’

The appetite for emerging markets stocks is fueled by bullishness about China. A net 61% of respondents forecast China’s economy improving—a contrast from November, when a net 87% expected it to weaken.

For the first time since early 2005, panelists are underweight (net 2%) their favorite recessionary sector, pharmaceuticals, compared to a net 21% overweight in April. Investors have also reduced holdings in Staples, Telecoms, and Utilities in favor of Energy, Materials, and Industrials. They have continued to increase allocations to Banks, reducing the net underweight position to the sector’s lowest since June 2007, according to the results.

Nonetheless, a net 6% of asset allocators remain underweight in equities globally. “The recharged optimism of fund managers is not fully matched by asset allocators. One upside risk for markets is more asset allocation out of cash and bonds into equities,’ said Hartnett.

A total of 220 fund managers, managing a total of U.S. $617 billion, participated in the global survey from May 8 to May 14. A total of 182 managers, managing U.S. $355 billion, participated in the regional surveys. The survey was conducted by Banc of America Securities–Merrill Lynch Research with the help of market research company TNS.