Merrill Lynch Fund Manager Survey Finds Risk Appetite Returning as Aversion to Banks Eases

NEW YORK and LONDON - Global economic optimism at highest since 2004

Risk appetite has started to pick up on the back of improving global economic sentiment, according to the Merrill Lynch Survey of Fund Managers for April. Optimism about growth has reached its highest level since early 2004. A net 26 percent of respondents say the global economy will strengthen in the next 12 months, up sharply from negative 24 percent in January.

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In contrast to March, investors are starting to act on the improving outlook and are unwinding previously-entrenched, bearish positions. A vital difference is that investor pessimism on bank stocks has started to recede. The net percentage of respondents underweight banks swung significantly in April to a net 26 percent from 48 percent in March. The net percentage of investors overweight cash fell to 28 percent from 41 percent in March. Just 17 percent of respondents are underweight equities compared with 41 percent in March. Asset allocators are turning towards cyclical sectors, such as technology.

“Improving sentiment on financials has decisively removed the log jam on sector rotation,” said Gary Baker, co-head of international investment strategy at Banc of America Securities-Merrill Lynch Research. “This is enabling broader optimism about growth to feed into greater risk appetite and prompting a march out of defensives into cyclicals.”

Michael Hartnett, co-head of international investment strategy at Banc of America Securities-Merrill Lynch Research said: “The consensus has shifted from apocalyptically bearish to reluctantly bullish. But it’s important to note that asset allocators are still underweight equities, indicating they have yet to fully embrace the idea of a new bull market.”

Bullishness towards China at six-year high

China continues to be a beacon of hope for the global economy. Portfolio managers are more optimistic on Chinese growth that at any point since 2003. A net 26 percent of respondents believe Chinese economic growth will accelerate over the next 12 months. As recently as November, 85 percent expected it to decelerate.

“Investors looking to play the global recovery are using China and emerging markets, rather than Europe or Japan, to do so,” said Hartnett.

Thanks largely to China’s influence, global emerging markets have been the prime beneficiary of improving sentiment towards equities with a net 26 percent of asset allocators saying they are overweight the asset class, up from just 4 percent in March. Commodities, integral to emerging market growth, are increasing in popularity. A net 4 percent of asset allocators are overweight the asset class — the first net overweight reading since August of last year.

After emerging markets, the U.S. is investors’ other preferred location. A net 18 percent of respondents say that they would most like to overweight U.S. equities with a 12-month view. Europe and Japan are the least favored with a net 18 percent who say they would most like to underweight their equity markets.

Sector allocations mark end of extreme positioning

April’s survey shows strong evidence that investors have started to emerge from the recessionary rut that led them to take extreme asset allocations for protection. In addition to reducing underweight positions in banks, asset allocators have begun moving back towards traditional cyclical sectors.

Technology has become the most popular sector, with a net 27 percent of respondents overweight. Pharmaceuticals, the favorite in March and a classic bear market refuge, has seen a drop in popularity from 30 percent overweight to 21 percent. A net 17 percent are underweight industrials, down from a net 31 percent in March. Asset allocators are neutral on materials, compared with a net 10 percent who were underweight in March.

Survey of Fund Managers

A total of 214 fund managers, managing a total of US$561 billion, participated in the global survey from April 2 to April 8. A total of 181 managers, managing US$356 billion, participated in the regional surveys. The survey was conducted by Banc of America Securities-Merrill Lynch Research with the help of market research company TNS. Through its international network in more than 50 countries, TNS provides market information services in over 80 countries to national and multi-national organizations. It is ranked as the fourth-largest market information group in the world.

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Merrill Lynch is one of the world’s leading wealth management, capital markets and advisory companies, with offices in 40 countries and territories and total client assets of approximately US$1.2 trillion at December 26, 2008. As an investment bank, it is a leading global trader and underwriter of securities and derivatives across a broad range of asset classes and serves as a strategic advisor to corporations, governments, institutions and individuals worldwide. Merrill Lynch has approximately 50 percent ownership in BlackRock Inc., one of the world’s largest publicly traded investment management companies, with approximately US$1.3 trillion in assets under management at December 31, 2008. For more information on Merrill Lynch, please visit www.ml.com. Merrill Lynch was acquired by Bank of America on January 1, 2009.

Source: Banc of America Securities-Merrill Lynch

Susan McCabe Walley, +1-212-449-0389, susan_mccabe at ml.com, or Tomos Rhys Edwards, +44-20-7995-2763, tomos_edwards at ml.com, both of Banc of America Securities-Merrill Lynch; PHOTO: https://www.newscom.com/cgi-bin/prnh/20090218/CLW006LOGO