By Agency Reporter

Wednesday, 16 Feb 2011

Investors were in their most bullish form on equities and commodities this month over a 10-year period as optimism about growth surged, while inflation concerns led them to drastically sell down emerging stocks, a survey showed on Tuesday.

The monthly global fund managers’ survey from Bank of America, Merrill Lynch, showed that a net 67 per cent of respondents were overweight equities in February, compared with 55 per cent in January.

This month’s reading means the difference between overweights and underweights is 67 percentage points – a level seen for the first time since the poll started in April 2001.

The poll, which surveyed 188 participants who manage total assets of $569bn, also showed a collapse in emerging markets allocations. A net five per cent of respondents are portrayed as overweight – the lowest since March 2009 – compared with 43 per cent in January and an average reading of 27 per cent.

Inflation expectations hit a six-year high, with a net 75 per cent of respondents expecting higher inflation in the next 12 months.

“It’s one of the most bullish surveys we’ve had in a long time. Basically, the story is growth expectations keep going on higher. What we’re seeing is fairly extreme asset allocation decisions,” the equity strategist at BofA Merrill Lynch, Mr. Patrick Schowitz, said.

“Despite really high risk appetite, investors have sold out of emerging markets.There is a concern about inflation in emerging markets and what it means for interest rates and tightening,” he added.

Bond underweight positions rose to a net 66 per cent, levels not seen since April 2006, compared with 54 per cent last month.

Commodities are the second most favoured asset class after stocks, with a record net 28 per cent of investors being overweight from 16 per cent last month.

Cash underweight positions moved to a net nine per cent, levels not seen since January 2002, from five per cent in January.

Average cash holdings fell to 3.5 per cent from 3.7 per cent, a level that triggers an equity sell signal on BofA’s model.

Investors sold stocks in the following weeks five out of seven times when cash holdings were at this level in the past.

“Warning lamps are really flashing. But we’ve seen a shift out of fixed income and into equities. You would expect some extreme asset allocation into risky assets while that shift is going on,” Schowitz said.

Source: Punch