BofA Merrill Lynch Fund Manager Survey Shows Equity Bullishness at Record Level

Developed Markets Benefit as Emerging Markets Allocations Fall

NEW YORK & LONDON--()--Investors are more bullish towards global equities than at any time in the past decade, according to the BofA Merrill Lynch Survey of Fund Managers for February.

A net 67 percent of asset allocators say that they are overweight global equities, the highest reading since the survey began asking this question in April 2001. This represents a significant further increase from January and December when a net 55 and 40 percent were overweight the asset class, respectively. At the same time, bond and cash allocations continued to fall. A net 66 percent is underweight bonds, up from a net 54 percent a month ago, while a net 9 percent is underweight cash – the lowest allocation since January 2002. The difference between equity overweights and bond underweights has also reached its highest level since the survey began.

An unusual shift in regional allocations accompanies this increase in risk appetite. Only a net 5 percent of fund managers are now overweight global emerging markets equities, down from January’s net 43 percent. This represents the steepest monthly decline in emerging market exposure in the survey’s history and compares with the net 28 percent average weighting since this question was introduced.

In contrast, investors now report more positive stances on key developed markets. Appetite for eurozone equities has increased significantly – a net 11 percent overweight in February, compared to a net 9 percent underweight in January. A net 34 percent of respondents are overweight U.S. equities, up from a net 27 and 16 percent in January and December, respectively. Moreover, the U.S. and eurozone now rank as the two regions investors would most like to overweight going forward. Yet a month ago more respondents wanted to underweight eurozone equities (a net 17 percent) than any other region.

“Unusually, higher risk appetite has been accompanied by a dramatic downsizing in asset allocation to emerging markets, as surging global growth expectations have increased the value attractions of developed market alternatives,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.

“The surge in equity and commodity weightings, uber-low cash levels, rising inflation expectations and crashing EM allocations indicate that we are no longer in a Goldilocks environment. A jump in rates or weaker growth are the most likely catalysts for a spring correction,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research.

Greater conviction in U.S. rate rise in next 12 months

Investors remain confident in the global economy and corporate profits, even though their expectation of a future increase in U.S. interest rates has moved forward. A net 70 percent now see the Federal Reserve raising rates in the next year, compared to January’s net 62 percent. This marks the first time in a year that respondents have accelerated their timetable for higher U.S. rates.

Eighty-six percent of fund managers see short-term interest higher in 12 months’ time. This represents a 19-point rise since December.

An increasing majority expects global inflation to increase this year – a net 75 percent in February, up from a net 48 percent three months ago.

Nonetheless, a net 58 percent of investors expect the world’s economy to strengthen in 2011, a three-point rise from last month. This should be reflected in corporate profits, which a net 68 percent anticipates rising 10 percent or more this year – up from 57 percent and 45 percent in January and December, respectively.

An important component of inflation, commodity prices, now ranks as the biggest risk that investors identify. A net 33 percent rank it ahead of all other threats, up from a net 13 percent in January. This is reflected in their more negative outlook for corporate profit margins. A net 2 percent now say operating margins will fall in the next 12 months, compared to a net 10 percent who saw this measure improving over the same timescale last month.

At the same time, a growing number of fund managers are seeking to benefit from rising commodity prices. A net 28 percent are now overweighting the asset class, up from a net 16 percent a month earlier.

Strong sector shifts reflect risk appetite

Fund managers’ greater risk appetite is reflected in their very strong rotation between equity sectors. While increasing their overweight stance on technology shares (up to a net 51 percent, from a net 39 percent in January), they report notably greater confidence in financials and lower appetite for defensive stocks. Underweights in banks and insurers fell to a net 7 percent each, down from January’s respective net 21 percent and a net 15 percent. In contrast, they turned negative on pharmaceuticals (net 4 percent underweight, from a net 12 percent overweight a month earlier). Negative stances on consumer discretionary, consumer staples and utilities all intensified as well.

Clear regional differences underlie these global shifts. With EU sovereign funding no longer so pronounced a concern as in January, European respondents trimmed their underweight on banks by as much as 40 points – from a net 56 percent to a net 16 percent. In contrast, U.S. investors are more negative towards the sector this month.

Survey of Fund Managers

A total of 188 fund managers, managing a total of US$569 billion, participated in the global survey from 4 February to 10 February. A total of 154 managers, managing US$384 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS. Through its international network in more than 50 countries, TNS provides market information services in over 80 countries to national and multi-national organizations. It is ranked as the fourth-largest market information group in the world.

The goal of BofA Merrill Lynch Global Research is to be the premier global research franchise, providing clients with exceptional service, value-added investment insights and alpha-generating investment recommendations. Its global team of analysts provides investment recommendations on more than 3,200 stocks and 880 credits, while its economists and strategists provide market forecasts for nearly 60 countries and recommendations on 40 currencies.

The group was named 2010 Top Global Broker (second consecutive year), Top Europe Broker, No. 2 U.S. Broker, and No. 3 Asia broker by Financial Times/StarMine. The team was also named Best Brokerage by Forbes/Zacks for the second consecutive year and the 2010 winner of the Emerging Markets magazine’s EM Research Global Award. In addition, the group was named No. 1 in the 2010 Institutional Investor All-Emerging Europe and All-Latin America Research team surveys, No. 3 in the 2010 Institutional Investor All-America Equity, All-America Fixed Income surveys, and most recently No. 3 in the 2011 All-Europe Research Team survey.

Bank of America

Bank of America is one of the world's largest financial institutions, serving individual consumers, small- and middle-market businesses and large corporations with a full range of banking, investing, asset management and other financial and risk management products and services. The company provides unmatched convenience in the United States, serving approximately 57 million consumer and small business relationships with more than 5,800 retail banking offices and approximately 18,000 ATMs and award-winning online banking with 29 million active users. Bank of America is among the world's leading wealth management companies and is a global leader in corporate and investment banking and trading across a broad range of asset classes, serving corporations, governments, institutions and individuals around the world. Bank of America offers industry-leading support to approximately 4 million small business owners through a suite of innovative, easy-to-use online products and services. The company serves clients through operations in more than 40 countries. Bank of America Corporation stock (NYSE: BAC) is a component of the Dow Jones Industrial Average and is listed on the New York Stock Exchange.

Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated, which is a registered broker-dealer and a member of FINRA and SIPC, and, in other jurisdictions, locally registered entities. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured * May Lose Value * Are Not Bank Guaranteed.

www.bankofamerica.com

Contacts

Reporters May Contact:
Rinat Rond, Bank of America, 1.646.855.3152
rinat.rond@bankofamerica.com
or
Tomos Rhys Edwards, Bank of America, +44.20.7995.2763
tomos.edwards@baml.com

Contacts

Reporters May Contact:
Rinat Rond, Bank of America, 1.646.855.3152
rinat.rond@bankofamerica.com
or
Tomos Rhys Edwards, Bank of America, +44.20.7995.2763
tomos.edwards@baml.com