Investors remain cautious despite growing optimism

Investors’ optimism about global economic growth has reached a three-year high, according to the global Merrill Lynch Fund Manager Survey for March. However, managers remain risk-averse in what could prove a moment of truth for markets, according to Michael Hartnett, the co-head of international investment strategy at Bank of America Securities-Merrill Lynch.

“How investors resolve this anomaly between growth optimism and risk reluctance will determine the fate of equity markets this spring,” said Hartnett in a statement.

The economic and profit expectations composite rebounded from 38 in February to 43 in March, while views on the global economy reached zero, which indicates that optimists balanced pessimists. Profit expectations stayed negative at minus 29%, but had risen from minus 55% at the start of the year.

However, Merrill’s Risk & Liquidity composite declined to a four-month low, standing at 28 against an average of 40 since the measure was introduced in 2002. A net 41% of managers reported overweight cash positions.

Managers continued their flight from stocks into bonds: equity weightings fell to an all-time low of minus 41% against Merrill’s synthetic benchmark, which includes 60% equities. Banks and industrial underweights reached new lows. Nevertheless, a net 42% of the managers believed equities to be undervalued, against 24% last month.

Despite the low equity weightings, sector allocations saw some “signs of an early recovery phase”, according to Merrill Lynch. Overweights in pharmaceuticals fell to 30% from 37% in February and technology, moved to a net 28% overweight from 15% a month earlier.

Bonds moved to a net 26% overweight, sharply up from February’s figure of 7%. However, looking to the future, 37% of managers said bonds were overvalued.

Investors became less underweight commodities, moving to a net underweight position of 6%, after being 7% underweight last month and 34% underweight in December.

Regionally, investors were positively weighted to America (overweight by 12%) and emerging markets (overweight by 4%), but underweight the eurozone by 40% and Japan by 39%. The currencies of the eurozone and Japan were widely regarded as overvalued.

The global survey, conducted with Taylor Nelson Sofres, was based on the responses of 213 fund managers, managing a total of $533 billion (£369 billion), between March 6-12.