Investors are betting on QE2 rally

Despite a dramatic rise in risk appetite, global fund managers remain cautious on their expectations for economic growth, according to the Bank of America (BofA) Merrill Lynch fund manager survey for October.

The survey suggests investors are betting on a short-term “relief rally” created by a second round of quantitative easing (QE2), rather than assuming it will lead to a longer-term cure for global economies.

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

Gary Baker, the head of European equities strategy at BofA Merrill Lynch Global Research, says the last time the level of risk appetite was this high was in April 2009, just before the onset of the first phase of QE.

The surge in risk appetite was not reflected in the view of managers on global growth over the next 12 months. 1

According to the survey, a net 15% of managers now expect higher growth over the next year, versus zero in September.

However, only 9% expect above- trend growth in the coming 12 months. “Judgment is being reserved on 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.”

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 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 – 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, conducted with TNS, from October 8-14.