Investors' appetite for risk grows

Investors' appetite for risk grows

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Global investors have a restored appetite for risk amid greater optimism over the outlook for profits and the economy, according to the Bank of America Merrill Lynch (BAML) Fund Manager Survey for November.

A net 47% of the global panel expects the economy to strengthen in the year ahead, a significant rise from 33% in October. Similar positivity was expressed over profits with a net 42% stating that global corporate profits will improve in the coming year, up from 27% last month.

Investors have marked out deflation as the biggest risk to the market’s upward trajectory. Twenty-nine% of the global panel said that eurozone deflation is the biggest “tail risk,” ahead of geopolitical crisis (21%). Furthermore, asked in a new question what is the greatest risk in 2015, 71% opted for deflation over inflation.

Investors have signaled that their optimism has been translating into action over recent weeks. In October, a net 16% of the panel said they were taking lower than normal levels of risk. This month, 2% are taking above-normal risk.

Asset allocators have shifted out of cash and increased their allocations to equities. A net 13% of respondents to the global survey are overweight cash in November, down from a net 27% in October. The proportion of asset allocators overweight equities has risen by 12% points to a net 46%.

Japan is the region most in favor, while investors are sending mixed signals about appetite towards Europe. A net 45% of global asset allocators are overweight Japan, a rise from a net 32% in October and 23% in September.

Japan is also the most favored region for the coming year. A net 27 percent of the investor panel says that Japan is the region they are most likely to overweight in the next 12 months. This represents a nine-year high.

“Deflation might be in the back of investors’ minds, but taking on risk, especially in equities, in Japan and in the dollar is at the forefront of their thinking,” said Michael Hartnett, chief investment strategist at BAML Research. 

Global asset allocators increased their moderate overweight positions in Europe slightly this month – a net 8% are now overweight the region. But investors have also indicated that they would like to underweight the region in the coming 12 months.

Meanwhile, investors inside Europe have indicated optimism over the region’s prospects for improving growth and profits – a net 62% of the regional respondents forecast improving earnings per share for the coming year, up from 32% in October. But, they have increased cash holdings in the past month and have indicated a growing appetite to underweight France and scale back holdings in Italy.

“European stocks were recently boosted by the best earnings season in three years. However concerns over longevity of growth and deflation continue. Three wise themes of yield, quality, and large cap are the best places to hide in European stocks,” said Manish Kabra, European equity and quantitative strategist.



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