Risk appetite has started to pick up on the back of improving global economic sentiment, according to the Merrill Lynch Survey of Fund Managers for April.
Optimism about growth has reached its highest level since early 2004.A net 26% of respondents say the global economy will strengthen in the next 12 months, up sharply from negative 24% in January.
In contrast to March, investors are starting to act on the improving outlook and are unwinding previously entrenched, bearish positions. A vital difference is that investor pessimism on bank stocks has started to recede.
The net percentage of respondents underweight banks swung significantly in April to a net 26% from 48% in March. The net percentage of investors overweight cash fell to 28% from 41% in March.
Just 17% of respondents are underweight equities compared with 41% in March. Asset allocators are turning towards cyclical sectors, such as technology.
“Improving sentiment on financials has decisively removed the log jam on sector rotation,” said Gary Baker, co-head of international investment strategy at Banc of America Securities-Merrill Lynch Research.
Michael Hartnett, co-head of international investment strategy at Banc of America Securities-Merrill Lynch Research said: “The consensus has shifted from apocalyptically bearish to reluctantly bullish. Butit’s important to note that asset allocators are still underweight equities, indicating they have yet to fully embrace the idea of a new bull market.”
April’s survey shows strong evidence that investors have started to emerge from the recessionary rut that led them to take extreme asset allocations for protection.
In addition to reducing underweight positions in banks, asset allocators have begun moving back towards traditional cyclical sectors.
Technology has become the most popular sector, with a net 27% of respondents overweight. Pharmaceuticals, the favorite in March and a classic bear market refuge, has seen a drop in popularity from 30% overweight to 21%.
A net 17% are underweight industrials, down from a net 31% in March. Asset allocators are neutral on materials, compared with a net 10% who were underweight in March.
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