Institutional Investors: Risk-On in 2012

(January 17, 2012)  —  Institutional investors regained more confidence in the global economy in January than in the last 30 months, and are ready to take on more investment risk, a major survey has shown.

Just 3% of asset allocation specialists, with over $818 billion in combined assets, told the monthly Bank of America Merrill Lynch Fund Manager survey that they believed the global economy would weaken in the next 12 months.

This figure was significantly lower than the 27% of them who reported the same sentiment in December and was the sharpest drop since May 2010.

Bank of America Merrill Lynch’s Composite Risk and Liquidity Indicator was the highest since July last year, indicating investors are more likely to take on risk.

The average level of cash in portfolios has also fallen from 4.9% in December to 4.4% this month.

Michael Hartnett, Chief Global Equity Strategist at Bank of America Merrill Lynch Global Research, said:  “Investors are tip-toeing rather than hurtling toward higher risk exposure; the US market and high quality cyclical sectors, such as energy and tech, have been the main beneficiaries of lower cash holdings.”

Last week, MFS Chief Investment Strategist James Swanson told aiCIO that technology stocks were some of his main picks for outperformance in 2012.

The proportion of investors taking lower than normal levels of risk has improved to a net 33% of the panel, compared to a net 42% in December.

However, the survey said that investors had become more concerned about geopolitical risk than a month earlier. It said the proportion of respondents viewing geopolitical risk as “above normal” had jumped to 69% from 48% in December.

Europe – and more specifically the Eurozone, which saw several of its member states downgraded last week – remained unpopular with investors.

Gary Baker, Head of European Equities Strategy at Bank of America Merrill Lynch Global Research said: “Despite improvement in global and European growth expectations asset allocators remain deeply sceptical towards European equities, especially banks.”