The Bank of America-Merrill Lynch survey for December says that investors expect a total return of 7.7% from global equities in 2010, with the highest return of 9.1% for the Asia-Pacific region (ex-Japan), followed by 9% for global emerging markets. But as many as 44.5% of the respondents to the survey said they expected a return of between 10% and 20% for equities in the Asia-Pacific region, while 45% said they expected the same kind of returns from emerging markets in general.

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The 9% or so expectation is modest, after the jaw-dropping returns this year, and is an indication of a more turbulent period going ahead. Levels of optimism are already very high, indicating much room for disappointment and little for upside surprises. For example, the survey shows that corporate profit expectations have surged to a new peak of 76%, the highest reading since December 2003. Similarly, the composite growth indicator (which combines the outlook for economic activity and corporate profits growth) reached a new current cycle summit of 89, the highest since October 2003. A year ago, this indicator was at 25. And then there’s the dollar—a net 40% of investors believe the US dollar is undervalued, up from 36% in November. Emerging markets are inversely correlated to dollar strength.

Nevertheless, there are also indications of some juice left in the rally. Risk appetite remains at an elevated level, but at 44, the indicator hasn’t changed in the past three months. A year ago this indicator was at 29, having bottomed at 25 in October 2008. At the global level, cash positions are up to 4% compared with 3.7% last month. December also saw a net 3% of asset allocators saying they were overweight cash against zero last month. That means more liquidity on the sidelines. But another telling contrast is that a year ago a net 37% reported being overweight cash, another indication (alas, in hindsight) of the strength and rapidity of the rebound at the time. And while, as the recent rebound in the dollar index has shown, investor concerns about an undervalued dollar carry weight, BoA-Merrill Lynch had said in the November survey that the last significant rally in the dollar occurred when a net 50% believed the dollar was undervalued.

Importantly from the emerging markets point of view, 45% of investors are overweight the asset class—that’s high, but much lower than the 53% who were overweight in November, which again leaves the door open for more people to become overweight. India, because it is expensive, remains a firm underweight.

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