Allocations fail to reflect managers’ growing optimism

Global fund managers have become cautiously optimistic about pros­pects for global growth but this is not reflected in their asset allocations, according to the latest monthly survey from Merrill Lynch.

Gary Baker, the head of European equity strategy at Banc of America Securities-Merrill Lynch, says: “The macro environment is much more optimistic”. Less than a third say the global economy is in recession compared with two thirds only two months ago. A net 72% of managers expect the global economy to strengthen over the coming year.

Despite expectations of a recovery, managers have become less concerned about inflation. A net 21% expect inflation to rise compared with a net 30% last month. Baker says this probably helps to explain why bonds have rallied despite the economic upturn.

Overall, managers seem to be expecting a “Goldilocks recovery”: growth not too slow but not too fast, either, with the inflation risks that would bring. Only a net 3% see “tail risks” of deflation or high inflation becoming apparent.

But when it comes to allocating their cash, managers still appear nervous. The average cash holding increased from 4.1% this month – broadly in line with the long-term average – compared with 3.5% in August. A net 18% of managers are overweight cash compared with 10% last month.

Sentiment has shifted away from their previous stance of being overwhelmingly in favour of emerging markets. The net overweight position on the asset class is 40% compared with 52% last month. “[Emerging markets] are no longer the only game in town,” says Baker.

The second most popular region is the eurozone, with managers ­taking a net 1% underweight position compared with a net 13% last month. It is now at its highest weighting since February 2008.

Within emerging markets, managers have become more negative on China as valuations have increased and profit taking opportunities have emerged. A net 9% are underweight after 13 months of net overweight positions.

Managers are ­over­weight on Brazil, ­Russia and Turkey. Chile, Malaysia and Israel are the highest underweight positions.

Among sectors the most popular are technology followed by energy. The least popular positions are in discretionary followed by utilities.

Some 234 fund managers with a total of $667 billion (£405 billion) of assets participated in the survey. It was conducted with TNS, a market research company, from September 4-10.