Fund managers are taking on more risk amid improving sentiment for the year ahead, but still have some way to go before they reach previous levels of euphoria, according to the latest edition of the Bank of America Merrill Lynch Global Fund Manager Survey.
The monthly survey – completed by 202 panellists with $630bn in assets under management – found that while asset allocators are optimistic about the prospects for the economy and markets, they are not at extreme bullish levels.
Cash allocations remain unchanged for the third consecutive month at 4.2 per cent, the lowest level since March 2013, with the bank’s ‘cash rule’ in neutral territory.
Meanwhile, the BofA Bull & Bear Indicator – the bank’s flagship trading model – stood at 6.9, below the “extreme bullish” level of 8.0, the point at which risk assets should be sold.
Nevertheless, fund managers are generally feeling more adventurous, with a net 2 per cent of allocators taking higher-than-normal risk levels, the highest reading since March 2018.
Equity allocations have increased from a net 12 per cent underweight in August 2019 to a 32 per cent overweight. However, this remains below the net 50 per cent overweight level that is consistent with prior market tops.
Attitudes to risk come as respondents became more bullish about prospects for the global economy in 2020.
Global growth expectations are strong with a net 36 per cent of investors bullish about the prospects for the next 12 months – the highest level since February 2018 – although this is below historic ‘boom’ levels.
Fund managers expect equity markets to continue rising, according to the survey, peaking during the third quarter of the year and reaching levels not previously recorded by the survey.
“Investors are bullish but not euphoric,” said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch. “We stay irrationally bullish risk assets until peak positioning and peak liquidity incite a spike in global bond yields and ‘the big short’ opportunity.”
On a corporate level, investors remain confident in their corporate profit expectations after a 14 percentage-point surge in January, as 27 per cent said they expected an improvement in profits over the coming 12 months – the highest level since March 2018.
However, concerns about the credit cycle and the health of corporate balance sheets remain with 42 per cent regarding companies as overleveraged.
Opinion was split about how companies should best allocate profits with 44 per cent believing that capital expenditure was a more worthwhile use than the 36 per cent of investors who wanted corporates to improve balance sheets.
Having dominated investor concerns for much of the past two years, trade war was overhauled this month as a net 29 per cent of respondents highlighted the upcoming US presidential elections between Donald Trump and his Democrat opponent as the biggest tail risk for markets.
Allocations to UK equities were unchanged following the general election of Boris Johnson’s Conservative party at a 13 per cent underweight, the consensus regional underweight. However, it should be noted that this is close to its pre-referendum 1999-2016 average of 10 per cent underweight and well below the post-referendum 28 per cent underweight.
The consensus overweight remains emerging market equities where asset allocators increased their holdings by 7 percentage points month-on-month to a 32 per cent overweight.
Sentiment towards Europe also continued improving, rising by 3 percentage points to a 27 per cent overweight, its highest level since May 2018.
Allocations to US equities were down by 5 percentage points month-on-month to a 4 per cent overweight, while Japanese equities also fell to a 2 per cent overweight.
On a sector level, international allocators “continue to own a barbell of growth sectors & higher quality vs ‘bond proxy’ defensives & low-quality value”.
The largest overweight is technology representing at 31 per cent, while utilities remains the most out-of-favour sector at a 29 per cent underweight.