Merrill Lynch Survey: investors predict improvement of world economy

According to the Merrill Lynch Survey of Fund Managers for May, seven out of ten investors predict the world economy will improve in the next twelve months. Supported by positive expectations on corporate profits, portfolio managers are putting their money to work. Average cash holdings have fallen to 4.3 % from 4.9 % in April. Equities are more popular, especially cyclical sectors. Investors have moved to a net underweight position in bonds for the first time since last August. Many are rushing to emerging markets, as investor optimism on China's economy is higher than at any point in the past six years. Michael Hartnett, Banc of America Securities-Merrill Lynch co-head of international investment strategy warns against risk, especially in emerging markets, which is reminiscent of bubble-like behavior. A record net 40 % of fund managers are looking to overweight the region in the next 12 months. Sentiment towards the global economy has completed a sharp turnaround from the dark days of October 2008, when a net 60 % of investors forecasted a worsening outlook. In May's survey, a net 57 % say the economy will improve over the next 12 months, up from 26 % in April. Investors have suddenly become bullish about corporate profits with a net 18 % who say the outlook for global profits will improve in the next 12 months. This represents a big swing from April when a net 12 % were bearish about profits. Bullishness about China's economy has reached its highest level since the survey began tracking China in 2003. A net 61 % of respondents see its economy improving - in November, a net 87 % of the panel expected the Chinese economy to weaken. A shift out of defensive investments towards cyclical stocks is ongoing. Investors have also reduced holdings in Staples, Telecoms and Utilities in favor of Energy, Materials and Industrials. They have continued to increase allocations to Banks, reducing the net underweight position to the sector's lowest since June 2007.