Surveys Find Trend Towards Equities
Tuesday, January 26, 2010

Two recent surveys are showing a trend towards more investment in equities. The BofA Merrill Lynch survey attributes this to greater risk appetite; Scorpio Partnership suggests it is at the expense of the hedge funds.

The global survey conducted by BofA Merrill Lynch Research quizzed 209 fund managers, managing a total of USD539bn, in the period January 8 to 14. A total of 169 managers, managing USD404bn, participated in regional surveys. The Scorpio Partnership Study collated the views of 33 private wealth management firms across the globe managing in excess of USD7 trillion. Those surveyed included the private banking divisions of universal banks, private banks, private client asset managers, and single and family offices.

BofA Merrill Lynch Global Research thought their survey was one of the more bullish they had seen, suggesting that investors buy into the idea that this recovery has legs. "We are, however, seeing early signs that might alert contrarians looking for a selling opportunity – namely low cash allocations and possible complacency against a sell off in stocks," said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Global Research.

Commenting on the findings of their own survey, Scorpio managing partner Sebastian Dovey said: "Cautiously benefitting from market volatility appears to be the plan of attack."

The BofA Merrill Lynch Global Research survey included the following salient points:

• A net 2% were taking "higher than normal" risk, compared with a net 7% taking "below normal risk" in December. These figures followed several months of investors displaying optimism about the economy but maintaining a more cautious risk and investment profile.
• Average cash balances fell to 3.4%, the lowest since mid-2007 and down significantly from 4.0% in December.
• A net 52% of asset allocators were overweight equities, up sharply from a net 37% in December.
• A net 55% had no protection against a fall in the next three months, compared with a net 48% in December. Investors were moving into cyclical stocks, were positive about profits and urging management teams to invest in growth.
• For the first time since mid-2006, 40% said capital investment headed the list of investors' priorities – ahead of reducing debt and returning cash to shareholders.
• A net 55% said that companies were currently under investing, up from a net 48% in December.
• A net 15% took the view that corporate balance sheets were "under leveraged," up from a net 9% a month ago.
• A net 63% of global investors expected corporate earnings to increase by at least 10% over the next 12 months, up from a net 46% in December. The outlook for margins is also positive, with a net 40% of investors predicting that operating margins would improve.
• The net percentage of respondents underweighing banks had fallen to 16% from 37%. European respondents to the regional survey had become more bullish about Banks and also Automotives.
• Within Japan, optimism over the economy and earnings picked up since November. A net 63% of the regional panel expected a stronger Japanese economy in 2010, up from 30% in November. A net 87% expected improved earnings, up from 59% in November. Japanese equities were identified as the most undervalued in the world and over the past two months Japanese equities became more popular than eurozone equities.

The Scorpio Partnership Survey included the following points:

• Current allocation to equities in a balanced portfolio stood at 49% – 12% higher than at the start of 2009. 42% of firms anticipated an increase in their equity weighting in 2010.
• 74% and 55% of respondents said they intended to keep their respective asset allocations towards cash and fixed income the same. However, 39% looked to reduce their exposure to bonds this year as problems in the asset class grow. Only 6% expected to increase exposure to bonds.
• Exposure to alternatives plummeted from 24% to 7% over the course of the year.
• The decline in sentiment towards alternatives was tipped to continue into 2010 with property being the only exception, where 20% expect to increase their exposure.
• 29% of those surveyed expected to reduce their exposure to structured products this year.
• By end-2009, 40% of firms were allocating towards in-house products, a rise of 18% over the year. Scorpio attributed this to institutions seeking to protect diminishing margins, particularly in lower margin product areas.