Bullishness returns to global markets: survey

Bullishness in global markets has reached new heights with seven out of 10 investors predicting that the world economy will improve in the next 12 months, reveals the Merrill Lynch Survey of Fund Managers for May.

220 fund managers, managing a total of $617 billion, participated in the global survey from 8 May to 14 May. 182 managers, managing  $355 billion, participated in the regional surveys. The survey was conducted by Bank of America Securities-Merrill Lynch Research with the help of market research company TNS.

Supported by positive expectations on corporate profits, portfolio managers are backing their optimism  by putting their money to work. Average cash holdings have fallen to 4.3 per cent from 4.9 per cent in April. Equities, while underweight, are more popular, especially cyclical sectors that are expected to perform best in arecovery.

Investors have moved to a net underweight position in bonds for the first time since last August, with several rushing to emerging markets, as investor optimism on China's economy is higher than at any point in the past six years.

''Investors are finally opening their wallets and reducing cash balances to mid-cycle levels to buy equities, cyclical stocks and risky assets,''said Michael Hartnett, Banc of America Securities-Merrill Lynch co-head of international investment strategy. ''However, this rush to take on risk, especially in emerging markets, is reminiscent of bubble-like behavior. A record net 40 per cent of fund managers are looking to overweight the region inthe next 12 months.''

''Having addressed their most urgent priority by returning to financial stocks, this month investors have added exposure to cyclical, real economy stocks and further purged defensiveoverweight positions,''said Gary Baker, Banc of America Securities-Merrill Lynch co-head of international investment strategy.

Stark turnaround in Europeans entiment and global profit outlook
Sentiment towards the global economy has completed a sharp turnaround from  October 2008, when a net 60 per cent of investors forecast a worsening outlook. In May's survey, a net 57 per cent say the economy will improve over the next 12 months, up from 26 per cent in April.

Nowhere has the reversal in economicoutlook been more pronounced than in Europe. A net 35 per cent of respondents to the Regional Fund Manager Survey expect Europe's economy to improve in the coming year. That's in sharp contrast to April when a net 26  per cent had forecast further deterioration.

Investors have suddenly become bullish about corporate profits with a net 18  per cent who say the outlook for global profits will improve in the next 12 months. This represents a big swing from April when a net 12  per cent were bearish about profits.

Risk appetite returns as China optimism hits new high
The heightened appetite for equities is concentrated on emerging markets. A net 46  per cent of investors are overweight emerging market stocks, up from a net 26  per cent in April. Bullishness about China'seconomy has reached its highest level since the survey began tracking China in 2003. A net 61  per cent of respondents see its economy improving; in November a net 87  per cent of the panel had expected the Chinese economy to weaken.

A shift out of defensive investments towards cyclical stocks is ongoing. For the first time since early 2005,  panelists are underweight (net 2 per cent) their favorite recessionary sector, pharmaceuticals, compared with a net 21  per cent overweight in April. Investorshave also reduced holdings in staples, telecoms and utilities in favor of energy, materials and industrials. They have continued to increase allocations to banks, reducing the net underweight position to the sector's lowest since June 2007.

However, on a less sanguinenote, asset allocators have yet to fully embrace equities. A net 6 per cent of asset allocators remain underweight in equities globally, with significant number in Japan, the eurozone and the UK.''The recharged optimism of fund managers is not fully matched by asset allocators. One upside risk for the markets is more asset allocation out of cash and bonds intoequities,''said Hartnett.

A total of 220 fund managers,managing a total of $617 billion, participated in the global survey from 8 May to 14 May. A total of 182 managers, managing  $355 billion, participated in the regional surveys. The survey was conducted by Banc of America Securities–Merrill Lynch Research with the help of market research company TNS.  Through its international network in more than 50 countries, TNS provides market informationservices in over 80 countries to national and multi-national organizations. Itis ranked as the fourth-largest market information group in the world.