Tuesday, October 19, 2010

BofA Merrill Lynch Sees Fund Managers "EMbracing Risk"

While the mother BofA fights the legacy, the monthly Global Fund Manager Survey by Merrill Lynch is out of the gates of research factories today. The key take-aways this month:

Liquidity prospects taking risk appetite for a ride
The October FMS sees a resurgence in risk appetite compared to the caution of the last 3 months as the prospect of a further dose of QE in the US is forcing portfolio adjustments. And yet, with only a small uptick in growth expectations consensus is betting on short term relief rather than a long term cure. Equities as an asset class have benefited from this sentiment shift but the focus is a very narrow one on Emerging Markets (and commodities).

Risk appetite: major upgrade
The risk being taken in investor portfolios saw the biggest jump since April ‘09 Our Risk & Liquidity indicator surged to 43 from 37. Cash balances fell to 3.8%, not extreme. Hedge funds raised gearing levels to 1.44, the highest since March ‘08. A net 45% of investors see USD as undervalued, but only net 12% think it will appreciate over the next 12 mths (down from 38% in Sept).
Economic growth: minor upgrade
Investors are reserving judgement on the likely real economic effects of QE. A net 15% now expect higher growth (0% last month) with the threat of a double dip largely dismissed (by net 82%). But only 9% expect above trend growth in the coming 12mths. Inflation expectations moved sharply higher (a net 27%, up from 9%) and with negative $ views commodities benefited. But the narrow focus is highlighted with only a net 11% expect stronger corporate profits (vs. 2% in Sept).

Emerging Markets or emerging market growth
A net 71% of investors see bonds as overvalued, the highest level since Sept ’05. Allocators raised weightings in equities (+27% from 10%) and commodities (+17% from 4%). Bonds fell to a net 24% u/w and cash to 6% o/w (vs. 18%). By region, a net 49% are O/W EM, the highest since Nov ’09; at +3% EU is the only other O/W. Despite valuation concerns, EM is the only region investors want to o/w in the coming 12 mths. Sector moves were EM-related with energy, industrials & materials benefiting over utilities and financials. At +1% consumer discretionary saw its first ever positive reading. Low growth world = tech the favoured sector.
For the contrarian:
long USD, banks, utilities, Japan; short EM, tech, commods
An extreme preference for EM over Japan triggers a contrarian trading rule this month; the last time we got close on this Japan outperformed EM by 9% in the following 3 mths. Other contrarian trades are long USD, banks and utilities; short EM FX, tech and commodities.
Click on chart to enlarge, courtesy of BofA Merrill Lynch.

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