(February 14, 2012) — Investors have reported the most improved liquidity conditions since before the financial crisis, indicating a better environment for risk-taking, a monthly survey has shown.
A net 32% of managers controlling $783 billion said liquidity in global markets was ‘positive’ last week in a survey led by Bank of America- Merrill Lynch. This compared to the net 7% who said it was negative in January – the sharpest turnaround in monthly sentiment since October 2007, the bank said.
This was accompanied by the largest one-month leap towards equities since the start of 2011. A net 26% of respondents were overweight equities at the start of February, up from a net 12% last month, the survey found.
Michael Hartnett, Chief Global Equity Strategist at BofA Merrill Lynch Global Research, said: “Improved liquidity has aided this rally, but it’s important to emphasize that it also reflects improving economic sentiment. Hard economic data has to continue improving to sustain a recovery.”
The BoA Merrill Lynch survey showed investors’ risk appetite had risen, and the net level of asset allocators were overweight in emerging market equities last week. A net 44% were overweight these securities at the start of February, compared to a net 20% last month.
However, in a note today, Swiss asset managers Lombard Odier warned investors that liquidity had been boosted by the most recent round of the Long Term Refinancing Operation by the European Central Bank.
The firm said investors should be aware that increased liquidity had never improved growth in stagnant economies, nor had it ever it turned deficits into surpluses or reduced debt, so buyers into the equity rally should still be disciplined in their selling strategies.
The note added that the latest rally was likely to be curbed by an undercapitalised banking system and large sovereign debts.
Indeed, since the BoA Merrill Lynch survey was carried out last week, several European countries were put on ‘negative outlook’ status by ratings agency Moody’s. Following the positive news that the Greek Parliament had agreed even deeper austerity measures to enable the country to take troika bailout funds earlier in the week, Portugal’s economic state worsened and previously strong economies, including the United Kingdom, were put on Moody’s watch list.
Yesterday Fitch Ratings also downgraded Santander, the perceived strongest of the Spanish banks, and several of its subsidiaries.
Investor fears were not confined to the Eurozone, however, with only a net 5% of them saying they wanted to go underweight on the region – some 29% held this view in January. Investors said they would like to be underweight all regions outside emerging markets, including the United States.
By market close yesterday the FTSE100 in the UK had risen 1.98% since the start of February, the S&P500 had risen 2%, and the MSCI World Index had risen 3.09%, while the MSCI Emerging Market Index had risen 3.30%.