GLOBAL - Fund managers now support the prospect of a lasting recovery, the latest monthly sentiment survey from BofA Merrill Lynch has revealed. Evidence suggests fewer investors expect to protect against a potential fall in equities over the next three months and will instead follow a trend towards more cyclical stocks.

Findings from the January Fund Manager Survey highlighted an increase in risk appetite as, for the first time since January 2006, investors are taking above average risk relative to their benchmark. Figures showed a net 2% of respondents are taking 'higher than normal' risk, compared to a net 7% taking 'below normal risk' in December 2009. 

In particular, the survey by BofA Merrill Lynch Global Research of 209 fund managers - managing a total of $539bn (€377bn) in assets - showed there is an increasing interest in equities. A net 52% of asset allocators are overweight in the asset class, against 37% in the December study, while the percentage underweight in bonds has moved from 39% to 48% - the lowest position since October 2007.

The findings also revealed 55% of respondents have no protection against a fall in equities in the next three months, an increase of seven percentage points from December. BofA Merrill Lynch officials have interpreted this as meaning equities are seen as neutrally valued by investors. This is alongside results showing 58% of respondents believed bonds to now be overvalued.

Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research, said: "This survey is one of the more bullish we have seen and suggests that investors buy into the idea that this recovery has legs."

The survey also suggested portfolio managers are showing signs of turning to 'laggard' sectors and regions that have been shunned in recent months, including banks and consumer discretionary stocks. Figures from the European regional survey showed banks saw the largest increase in positioning with an improvement of 21 points from 37% underweight to 16%, while the automotive sector rose to a net 9% underweight to reach its highest reading since October 2007.

Japanese equities are also finding favour with investors, as 63% of the regional panel expect a stronger economy in 2010 and 87% said they expect improved earnings. The global fund manager panel also identified Japan as the most undervalued equity market in the world, with 20% naming Japan as the region it would most like to be overweight in in the next 12 months, compared to just 10% choosing Europe.

The research into European fund managers indicated that 17% of investors view European equities as undervalued, however asset allocators have reduced exposure to the eurozone as just 2% were in an overweight position compared to 11% in December. The view of UK equities also remains negative as 16% of those questioned were underweight in the region, while 10% of managers reported overweight cash positions.

Other findings from the survey suggested managers are actively encouraging companies to invest and take on debt, with 55% claiming companies are currently under-investing and 15% suggested balance sheets are 'under-leveraged'. BofA Merrill Lynch claimed this reflects the growing optimism about corporate earnings, as 63% of global investors now expect earnings to increase by at least 10% in the next year. This is compared to 46% in December.

Despite the growing optimism, however, Michael Hartnett, chief global equities strategist at BofA Merrill Lynch Global Research, added: "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."

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