Appetite for Risk Hits Nine-Year High

(January 15, 2013) — Investors’ appetite for risk in their portfolios hit a nine-year high, according to a monthly survey, as confidence in the global economy improves apace.

The much-touted “Great Rotation” from bonds to equities is now underway, according to the monthly Bank of America Merrill Lynch Survey that was published today.

A net 59% of a group of investors, who are responsible for $754 billion in assets, now expect the global economy to strengthen this year. A month ago, only 40% of them believed this to be true.

“Following the resolution of the US fiscal cliff, sentiment has surged,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “Half of investors now tell us that they would sell government bonds to buy higher-beta stocks, which is consistent with increasing growth and inflation expectations, and with our call for a ‘Great Rotation’ to start in 2013.”

Investors are still choosing their equities carefully, however, as the bank’s survey showed only some sectors were perceived to be undervalued.

Financial stocks found the most favour since April 2007, with the panel moving to its first overweight stance in almost six years. European equities were seen to be some of the most undervalued, whereas consumer staple stocks were viewed as the most expensive.

This sentiment jibed with that of European equity portfolio manager Dean Tenerelli at T Rowe Price.

Tenerelli told aiCIO that austerity measures in Europe were starting to work and the first signs of economic improvements were appearing.

“Growth won’t be great in Europe for the next few years, but things are improving,” said Tenerelli. “The market is looking for signs of hope and recovery. Corporate earnings are depressed for the moment, but investors always forget how much earning power is depressed in a decline. Price-to-earnings ratios have seen the fastest expansion in 20 years so for the rest of the year we might see a slowdown, but from a corporate earnings point of view, 2014 is going to be a recovery year.”

Tenerelli illustrated pockets where investors could find undervalued stocks; these included oil services, luxury goods and certain sectors in Spain.

“Telecom stocks can underperform in any market condition,” he said, confirming the view communicated by the Bank of America Merrill Lynch survey, which showed investors had moved underweight in these stocks.

“Anything people were holding on to in an effort to avoid the decline is done,” said Tenerelli.

For the full Bank of America Merrill Lynch survey, click here.