Investor sentiment has risen sharply so far in 2013 and appetite for risk has increased as investors see threats such as the US fiscal crisis and European sovereign debt problems diminishing, according to the January fund manager survey from Bank of America Merrill Lynch (BofAML).
Appetite for risk in investment portfolios is now at its highest level since January 2004 and a net 51 percent of investors are now overweight equities, according to the survey of 254 fund managers with $754 bn of assets under management. Investors have also cut their cash holdings to 3.8 percent in January from 4.2 percent in December 2012 and a high of 5.3 percent in June 2012, the survey shows.
The data from the survey, conducted between January 4 and 10, prompted BofAML analysts to reiterate predictions of a so-called Great Rotation as investors sell out of bond positions and increase their holdings in equities. Investors’ allocations to bonds, considered a safe haven in times of risk, fell to their lowest level since May 2011 in January this year, with a net 53 percent of investors underweight bonds.
‘Following the resolution of the US fiscal cliff, sentiment has surged,’ says Michael Hartnett, chief investment strategist at BofAML global research, in a statement. ‘Half of investors now tell us they would sell government bonds to buy higher-beta stocks, which is consistent with increasing growth and inflation expectations, and with our call for a Great Rotation to start in 2013.’
Almost 50 percent of investors say government bonds will start to be sold to buy equities in coming months if the ‘risk-on rally’ continues, marking a sharp increase from a little more than 35 percent in the December survey.
In terms of regional asset allocation, investors are a net 15 percent overweight European equities, the highest level since January 2008, and a net 3 percent underweight US equities, the first underweight position in a year and a half. The overweight position on emerging market equities rose to a net 40 percent in January from a net 38 percent in December.
Respondents say several tail risks remain on the horizon, however, with 37 percent citing a US fiscal crisis as the biggest risk and 23 percent saying the European sovereign debt crisis is still the top tail risk. A hard landing for China is cited as the top concern by 13 percent of investors and a sharp increase in oil prices is mentioned by 11 percent.
