Global fund managers have taken their biggest overweight stance in equities since July 2007 and their largest underweight stance in bonds since August 2007, according to the January Bank of America (BofA) Merrill Lynch Fund Manager survey.
In January a net 55% of global managers were overweight in equities, up from a net 40% in December. At the same time bond weightings fell from a net 47% underweight in December to a net 54% this month.
Gary Baker, the head of European equities strategy at BofA Merrill Lynch Global Research, says the acceptance of rising inflation combined with an optimistic outlook on growth, provide potent case for equity investment.
He says: “The survey shows that investors have now stopped fighting the Fed. They accept inflation will go higher but at the same time they do not fear a rise in interest rates and are buying into more risky assets as a result. This is entirely rational and does not suggest over exuberance.”
“Of all the developed central banks it is the Bank of England that has the biggest inflation risk to deal with”
Indeed the survey shows that a net 72% of managers now expect global inflation to increase over the coming 12 months, the highest percentage for over six years and up from 48% just two months ago. Despite this jump, views on the first Fed rate rise continue to be pushed back well into 2012.
“Of all the developed central banks it is the Bank of England that has the biggest inflation risk to deal with, making it the most likely to raise rates first,” says Baker. (article continues below)
Risk appetite among investors also remains high although cash balances rose marginally from 3.6% in December to 3.7%. However, Baker says this still remains below the five-year average of 4.2%.
Meanwhile, growing confidence in the global economy and corporate profits led a net 55% of managers to predict the global economy to strengthen in 2011, with a net 39% predicting “above trend” growth in the next 12 months. This is the highest reading since the question was introduced in February 2008.
In terms of regions, asset allocators cut their weighting to Europe to a net 9% underweight, a six-month low. Japan benefited from this move moving to a 5% overweight, up from a net 13% underweight last month.
In terms of sectors, the biggest surprise was a cutting in weightings to commodities, falling from a net 21% overweight in December to a net 16% overweight in January. Baker says he was surprised by this move, adding it is most likely the result of year-end profit taking.
Some 199 managers running $562 billion (£351 billion) of assets participated in the survey, conducted with TNS, a market research company, from January 7-13.