Last updated: October 16, 2012 7:20 pm

Investors set to move back into equities

Investors say they will ditch government bonds and buy riskier equities if the risk-on rally continues according to the latest Bank of America Merrill Lynch fund manager survey.

More than a third of managers said they favoured selling government bonds in order to fund a move into riskier high beta plays, according to a survey of 269 fund managers with $734bn in assets under management.


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The finding underscores what market observers say has been a general reluctance among individual investors to put their money into equities since the start of the financial crisis.

“Investors have dry powder in their equity guns,” said Kate Moore, global equity strategist at BofA Merrill Lynch.

The survey highlights that, while consensus among fund managers is still to take long positions on bonds and short positions on stocks, a small shift has begun from bonds to equities.

Allocation to equities is now at a six-month high, with 24 per cent of fund managers overweight the asset class. Beauty is in the eye of the beholder and Europe has returned to the pageant. European equities are as attractive as US equities to fund managers surveyed this month. A net 10 per cent are overweight equities in each region.

This is a significant divergence from two months ago when a net 13 per cent of fund managers were underweight Europe and a net 13 per cent were overweight US equities.

Investors’ risk appetite in Europe was notched up by the European Central Bank’s pledge to save the euro, propelling European stocks to their highest levels in more than a year.

“Tail risks in Europe are declining after decisions earlier this year to bail out Spanish banks and the ECB’s pledge to buy periphery bonds,” Jan Dehn, chief strategist at Ashmore Investment Management, said.

Yet as tail risks in Europe ebb, concerns about the US fiscal cliff, the $600bn of spending cuts and tax rises due on January 1, have grown.

For the third month in a row, fund managers have said that the potential inability of US Congress to agree on a deal to address that prospect is the biggest tail risk. Nearly half of fund managers are now more concerned about the US fiscal cliff than they are about the eurozone debt crisis.

However, the study exposed mixed signals from investors. Only 20 per cent of those surveyed said they believed the risk of the fiscal cliff was priced in to equities, underscoring cautious sentiment.

Nonetheless, a net 9 per cent said they were overweight US banking stocks, the strongest position in more than six years.

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