Bond concerns fuel switch to equities

Bond weightings among global fund managers hit their lowest level since August 2007 in January, according to a Bank of America (BofA) Merrill Lynch Fund Manager survey.

A net 54% of global managers underweighted the asset class in January, up from 47% in December. Meanwhile, equities reached their highest overweight position since July 2007, rising from a net 40% in December to 55% in January.

Gary Baker, the head of European equities strategy at BofA Merrill Lynch Global Research, says bond weightings have been in a steady decline for several months. He says the bond moves in the fourth quarter were painful for investors, exploding the idea that the asset class is low risk. (article continues below)

Instead, he says, the acceptance of rising inflation combined with an optimistic outlook on growth provide a case for equity investment.

“The survey shows that investors have stopped fighting the Fed,” he says. “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 overexuberance.”

The survey shows that a net 72% of managers 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 investors estimate the first rise in American interest rates will continue to be pushed back well into 2012.

“Of all the developed central banks, the Bank of England has the biggest inflation risk to deal with, making it the most likely to raise rates first,” says Baker.

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 lead 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, moving to a 5% overweight, up from a net 13% underweight last month.

In terms of sectors, the biggest surprise was a drop in exposure 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.

A total of 199 managers running $562 billion (£351 billion) of assets participated in the survey, conducted with TNS, a market research company, from January 7-13.