Investment Strategies

Global Investors Reluctantly Raise Equity Stakes, Frown On Cash, Debt - BoA/Merrill

Tom Burroughes London 13 April 2011

Global Investors Reluctantly Raise Equity Stakes, Frown On Cash, Debt - BoA/Merrill

Inflation and miserly returns from cash encouraged investors around the world in early April to increase exposure to equities, even though they became more downbeat about corporate profit forecasts, according to Bank of America Merrill Lynch yesterday.

In its latest monthly survey of fund managers, spanning 282 panelists with $757 billion of assets between 1 April and 7 April, the survey found that a net 50 per cent of respondents were overweight equities (compared with 45 per cent in March). A net 58 per cent of them were underweight bonds, compared with 59 per cent in the previous month.

The devastating earthquake in Japan, associated with continuing problems in the country’s nuclear plants at the time of writing, geopolitical uncertainties and European debt troubles, have created a far less attractive backdrop for equities.

“There is an interesting paradox at the heart of it [survey],” Gary Baker, head of European equities strategy at BofA Merrill Lynch global research, told journalists at a briefing on the survey. The apparent contradiction between bullish weightings on equities, and worsening prospects on profits and growth, can be resolved by understanding that asset allocators see few credible alternative places to put client money in an environment of inflation, very low interest rates, and government debt woes, he said.

The dilemma highlighted by the survey chimes with comments made by other wealth management firms, such as Rothschild Private Banking & Trust, or Sarasin, arguing that the low-return environment creates a headache in trying to preserve wealth, let alone grow it.

Cash unloved

Average cash balances in portfolios fell to 3.7 per cent in April from 4.1 per cent in March. Baker said Merrill Lynch regards a 3.5 per cent balance as the point when the firm looks to sell equities.

A net 19 per cent of respondents believe corporate profits will improve in the coming year, compared with 32 per cent in March; some 42 per cent of panellists say the world economy faces above-trend inflation and below-trend growth.

Problems in Japan led to investors pulling back from the quake-hit Asian economy, with a net 18 per cent of investors being underweight Japanese equities, compared with an 8 per cent overweight position in March. The US is the most favoured equity market – with an overweighting of 30 per cent, the survey found.

The most popular equity sector in April was energy, with a net overweight of 40 per cent – replacing technology as the investor’s darling; financials remain unpopular, with a net global underweight of 15 per cent.

Among other figures, the survey found that managers think the US Federal Reserve is most likely to hike interest rates in the first quarter of 2012. When asked about what extreme events, or “tail risks”, were most significant, the single biggest answer, at 34 per cent of respondents, was for commodity price inflation, a rise from 30 per cent giving this answer in March. European sovereign debt funding, premature fiscal tightening and the chances of defaults by US municipalities were also given as significant risks in April, the survey said.

Register for WealthBriefing today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes