Economic optimism soars, according to Merrill Lynch survey

Investor optimism about the global economy has soared to its highest level in nearly six years with portfolio managers putting their cash back into equity markets, according to the Merrill Lynch Survey of Fund Managers for August.

A net 75 per cent of survey respondents believe that the world economy will strengthen in the coming 12 months, the highest reading since November 2003 and up from 63 per cent in July. Confidence about corporate health is at its highest since January 2004. A net 70 per cent of panel respondents expect global corporate profits to rise in the coming year, up from 51 per cent last month. 

August’s survey shows that investors are matching their sentiments with action by putting cash to work. Average cash balances have fallen to 3.5 per cent from 4.7 per cent in July, their lowest level since July 2007. Equity allocations have risen sharply month over month with a net 34 per cent of respondents overweight on the asset class, up from a net seven per cent in July. Merrill Lynch’s Risk and Liquidity Indicator, a measure of risk appetite, has risen to 41, the highest in two years.

“Strong optimism in August represents a big turnaround from the apocalyptic bearishness of March. And yet with four out of five investors predicting below trend growth for the year ahead, a nagging lack of conviction about the durability of the recovery remains,” says Michael Hartnett, chief global equities strategist at Banc of America Securities-Merrill Lynch Research.

Hartnett adds: “The equity rally has been narrowly led by China and tech stocks. We have yet to see investors fully embrace cyclical regions such as Japan or Europe, or western bank stocks.”

Global emerging markets, led by China, and technology stocks are the strongest engines behind the early recovery, says Merrill Lynch. Investors would rather be overweight on emerging markets than any other region. A net 33 per cent of the panel prefers to overweight emerging markets, while investor consensus is to remain underweight on the US, the Eurozone, the UK and Japan.

Technology remains the number one sector, with 28 per cent of the global panel overweight on the industry. Industrials and materials lag, with global fund managers holding 11 per cent and 12 per cent overweight positions respectively.

Further behind are banks. Global fund managers remain concerned about the sector, holding a 10 per cent underweight position. In contrast, investors within emerging markets are positive about banks, with a net 17 per cent of fund managers in the regional survey overweight on bank stocks.