Betting on QE

Yesterday’s Merrill Lynch fund manager survey once again showed what a strange breed investors can be sometimes.

In an about-turn from the cautious attitude of the past three months, risk appetite soared in October as investors responded to speeches from Ben Bernanke, the chairman of the Federal Reserve, to fully embrace the idea a second round of quantitative easing (QE) is on the horizon. Indeed the last time risk being taken in investor portfolios jumped this much was in April 2009 when the first phase of QE began.

“It would seem the consensus is betting on a short term relief rally caused by QE, rather than a long term cure”

As a result cash balances within portfolios fell, while hedge fund gearing levels rose, and allocations to equities nearly tripled.

However despite this big up-tick in risk appetite, the same investors only feel marginally more bullish today on the prospects for global growth than they did last month, or the month before. Instead all judgment seems to be being reserved as to how QE2 might benefit the real economy. (article continues below)

As result the only equity region which benefited for the expected wave of QE, was emerging markets. In October a net 49% of asset allocators were overweight in the region, monthly rise of 17 percentage points. With the exception of the eurozone all the other major regions represented underweight positions in investor portfolios.

As such it would seem the consensus is betting on a short term relief rally caused by QE, rather than a long term cure. With a QE announcement expected by the Fed at the start of next month, it will be interesting to see how this shifts sentiment in November’s survey.