Big global investors have started 2012 in a better mood than they were at the end of 2011.

Instead of being gloomy about the economic outlook and markets, more have become confident.

It's a repeat of the start of 2011 when big investors were their most bullish about equities in a decade.

The first half sort of justified that performance, but the back half of 2011 took it all away as investors headed for cash, nursed losses and hunkered down.

And while Europe remains off limits to many fund managers for the time being because of the continuing high levels of risk, it's not a basket case for some managers.

According to the Bank of America Merrill Lynch Survey of Fund Managers for January released this week, fewer fund managers see the chance for a recession.

The survey finished late last week, just before the mass downgrades in the eurozone, but seeing markets took that in their stride, it shouldn't have all that big an impact on the thinking of these big investors.

The survey of 214 institutional investors shows only a net 3% predict the global economy will weaken in the next 12 months, against 27% in December, the biggest one-month improvement in the global view since May 2009.

A net 55% of asset allocators say that they are overweight global equities, the highest reading since July 2007.

It represents a significant increase from December when a net 40% was overweight the asset class.

At the same time, bond allocations have fallen: a net 54% are underweight bonds, up from a net 47% in December.

Risk appetite is also up, with cash levels at its lowest levels since July 2011, before the eurozone crisis deepened.

The survey reveals that cash holdings have fallen to 4.4% of portfolio's holdings on average, down from 4.9% in December.

The proportion of investors "taking lower than normal" levels of risk has also fallen to 33% of respondents, down from 42% in December.

Geopolitical risk was highlighted by respondents with more than two-thirds believing it was at "above normal" levels.

The survey also reveals that fears of a global corporate profit slowdown have receded in the past month, shrinking from 41% of respondents in December to 21% in January.

"Investors are tip-toeing rather than hurtling toward higher risk exposure; the U.S. market and high quality cyclical sectors, such as energy and tech, have been the main beneficiaries of lower cash holdings," said Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.

The analysts said asset allocators remain deeply averse to European equities, especially banks, though deeper negative views toward Europe have eased somewhat.

According to the survey, although there is still a "gulf" between the US and Europe as an investment location, negative views have eased.

It found 56% of respondents thought the outlook for corporate profits was more favourable to the US, increasing from 50% in December.

The survey also showed 70% of respondents thought the profit outlook for Europe was least favourable, marking a fall from 72% in December.

Gary Baker, head of European equities strategy at BofA ML Global Research, says: "Despite improvement in global and European growth expectations asset allocators remain deeply skeptical towards European equities, especially banks."

Investors have upped exposure to US equities on average to 28%, compared with 23% in December.

While 31% remain underweight eurozone equities, slightly better than the 35% underweight in December.

Technology has regained its status as the most favored global sector, and US fund managers are returning to banks, the survey said.

Growing belief in U.S. equities, already evident in December's survey, has firmed significantly this month.

A net 27% of the global panel is now overweight U.S. equities, the highest reading since November 2008 and surpassing December's level of a net 16%.

A net 15% of the panel would like to overweight U.S. equities more than any other region, up from a net 7% in December.

A net 43% expects the US dollar to appreciate versus the euro or the yen on a trade-weighted basis, up from a net 14% two months ago.

Japan has also benefited from improved sentiment. Global investors have moved overweight Japanese equities for the first time since May 2010 and for only the fifth month in 42 month.

A net 5% global panel is overweight Japanese equities, compared with a net 29% being underweight in November.

Global emerging markets (GEM) support remains high but has continued to decline.

A net 43% of asset allocators are overweight GEM equities, but this is lower than the net 56% two months ago. A net 20% of investors want to overweight GEM equities more than any other region.

This reading has slipped from a net 31% in December.

These lower readings come as belief in China's economic prospects has eroded.

But this could be misplaced because the data for 2011, and especially the final quarter did show better inflation, slightly stronger growth and output, but concerns about property prices and investment.

A net 19% of respondents to the regional survey say that China's economy will weaken this year. Two months ago, a net 16% forecast a stronger Chinese economy.

Commodities investment, a bellwether for emerging market optimism, has fallen with a net 16% of asset allocators overweight the asset class compared with a net 22% a month ago.

This fall comes despite the fact that commodities traditionally benefit when investors expect higher inflation.

The survey showed that despite the crisis, European fund managers have started 2011 in stronger spirits.

The proportion of the panel predicting a stronger European economy has leapt to a net 44% from a net 26% in December.

An increasing number believe European companies will deliver improved earnings in 2011.

This optimism comes as global concerns about EU sovereign debt fund risk have fallen away from the highs of December.

Copyright Australasian Investment Review.
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