Risk appetite surges ahead of QE2, says survey

The risk being taken by global fund managers saw its biggest jump since April last year in October, according to the Bank of America (BofA) Merrill Lynch Fund Manager Survey.

The survey’s risk and liquidity indicator rose from 37 to 43, cash balances fell, and the proportion of asset allocators overweight in equities nearly tripled from a net 10% in September to a net 27%.

However, as risk levels hit the highest level since the onset of the first phase of quantitative easing, Gary Baker, the head of European equities strategy at BofA, Merrill Lynch Global Research, says investors are staying on the sidelines.

“Judgement is being reserved of the effect of QE2 on the underlying economy,” says Baker. “This month’s survey saw no big increase in expectations for global growth and profitability, although the danger of a double-dip recession has now been largely dismissed.” (article continues below)

According to the survey, a net 15% of managers now expect higher growth over the next year versus 0% in September. However, only 9% expect above trend growth in the coming 12 months.

A net 15% of managers now expect higher growth over the next year

Inflation expectations moved sharply higher in October, with the proportion of investors predicting higher inflation rising from a net 9% in September to a net 27% in October.

While asset allocators nearly tripled their exposure to equities in October, Baker notes the focus was very narrow, with emerging markets being the major attraction. Indeed, a net 49% of asset allocators were overweight in emerging markets in October, its highest level since November 2009.

With the exception of the eurozone, all the other major regions represented underweight positions in investor portfolios.

Meanwhile, a net 71% of investors perceived bonds to be overvalued in October, which is the highest reading since September 2005.

A total of 194 fund managers, managing a total of $492 billion (£312 billion), gave their opinions on asset allocation for the Bank of America Merrill Lynch survey from October 8-14.