Developed markets benefit as emerging markets allocations fall JEDDAH: Investors are more bullish toward global equities than at any time in the past decade, BofA Merrill Lynch Survey of Fund Managers for February showed. A net 67 percent of asset allocators say that they are overweight global equities, the highest reading since the survey began asking this question in April 2001. This represents a significant further increase from January and December when a net 55 and 40 percent were overweight the asset class, respectively. At the same time, bond and cash allocations continued to fall. A net 66 percent is underweight bonds, up from a net 54 percent a month ago, while a net 9 percent 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. An unusual shift in regional allocations accompanies this increase in risk appetite. Only a net 5 percent of fund managers are now overweight global emerging markets equities, down from January's net 43 percent. This represents the steepest monthly decline in emerging market exposure in the survey's history and compares with the net 28 percent average weighting since this question was introduced. In contrast, investors now report more positive stances on key developed markets. Appetite for eurozone equities has increased significantly – a net 11 percent overweight in February, compared to a net 9 percent underweight in January. A net 34 percent of respondents are overweight US equities, up from a net 27 and 16 percent in January and December, respectively. Moreover, the US 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 percent) 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. “The surge in equity and commodity weightings, rising inflation expectations and crashing EM allocations indicate that we are no longer in a Goldilocks environment. A jump in rates or weaker growth are the most likely catalysts for a spring correction,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research. Investors remain confident in the global economy and corporate profits, even though their expectation of a future increase in US interest rates has moved forward. A net 70 percent now see the Federal Reserve raising rates in the next year, compared to January's net 62 percent. This marks the first time in a year that respondents have accelerated their timetable for higher US 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 percent in February, up from a net 48 percent three months ago. Nonetheless, a net 58 percent of investors expect the world's economy to strengthen in 2011, a 3-point rise from last month. This should be reflected in corporate profits, which a net 68 percent anticipates rising 10 percent or more this year - up from 57 percent and 45 percent in January and December, respectively. An important component of inflation, commodity prices, now ranks as the biggest risk that investors identify. A net 33 percent rank it ahead of all other threats, up from a net 13 percent in January. This is reflected in their more negative outlook for corporate profit margins. A net 2 percent now say operating margins will fall in the next 12 months.
