Continued optimism about the prospects for a global economic recovery and rising corporate profits has pushed risk appetite to its highest level in more than three years, according to the BofA Merrill Lynch Survey of Fund Managers for October.

The investment bank’s monthly report, which during the first week of October surveyed 229 fund managers who manage a total of $616 billion, revealed not only that investors are increasingly confident that the threat of a double-dip recession is waning but also that a higher proportion of managers consider Eurozone equities to be undervalued than at any other time since April 2001.

Global sentiment
It emerged from last month’s survey that a little over half (53%) of those surveyed did not agree that a global recession was unlikely in the next 12 months. This time round, however, 65% believe it is unlikely, implying that the threat of a double-dip in the global economy has waned in managers’ eyes. Similarly, even more respondents believe the outlook for corporate profits will improve in the next year: 72% versus 68% in September.

Backing up these findings, asset allocators are shown to be switching out of cash and into equities as their risk appetite increases, with current cash positions at their lowest level since January 2004. A net 7% of respondents are now underweight cash, whereas last month the majority of respondents were still slinging on to their wallets—a net 10% were overweight cash a month ago, while a net 38% of panelists are overweight equities in October.

The sectors favoured by this month’s asset allocators include Technology, Energy, Materials and Industrials, with financial stocks still proving elusive.

European sentiment
It is quite a different situation within Europe, however. Though sector conviction among eurozone fund managers remains near record lows, European investors are now overweight Banks for the first time in more than two years. This is not only in stark contrast to other regions but, if maintained, could prove a trigger for sentiment going forward, the BoA Merrill Lynch survey concluded.

Commenting on the findings, Gary Baker, head of European equity strategy at BofA Merrill Lynch Global Research, said: “Europe is emerging phoenix-like from the ashes as confidence in its banks boosts overall confidence in European equities.”

Overall optimism about Europe is pronounced in the October survey. A net 30% of global portfolio managers see eurozone equities as undervalued relative to other regions, the highest reading since April 2001, while a net 9% of panelists want to overweight the region in the next 12 months, up from 7% last month. This contrasts with Japan, which is regarded as the least attractive region in which to invest over the next year by a net 20% of investors surveyed.

Emerging markets & currency
While Japan may be out of favour, confidence in the prospects for the Chinese economy and emerging markets in general remains robust this month. A touch under half (49%) of respondents believe China’s economy will strengthen over the next 12 months and a net 36% claim that emerging markets is the region they would most like to overweight in the next year.

Japan’s economic outlook is marked by a growing number of asset allocators who view the yen as overvalued - a net 34% versus 21% last month, while ongoing weakness is the US dollar has led to a jump in the proportion of those who consider the greenback to undervalued - 20%, up from just 1% in September.

These latest figures suggest that, with the dollar seen as cheap and the yen as expensive, “central bank intervention in currency markets in coming months could soon prove successful,” said Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.

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alfred.ming@morningstar.com