Investors start to put cash to work says Merrill Lynch survey

Investor optimism about the global economy has soared to its highest level in nearly six years. Portfolio managers are putting cash back into equity markets, according to the August survey of fund managers by Merrill Lynch.

Three-quarters of respondents said they believe the world economy will strengthen over the next 12 months. This is the highest reading since November 2003 and up from 63% in July.

Confidence about corporate health is at its highest since January 2004. A healthy 705 said they expect global corporate profits to rise this year, up from 51% in July.

Average cash balances have fallen to 3.5% from 4.7% in July, their lowest level since July 2007.

Equity allocations rose sharply month-over-month with a net 34% of respondents overweight the asset class, up from a 7% in July.

Merrill Lynch's Risk and Liquidity Indicator, a measure of risk appetite, has risen to 41, the highest in two years.

With four out of five investors predicting below trend growth for the year ahead, a nagging lack of conviction about the durability of the recovery remains, said Michael Hartnett, chief global equities strategist at Banc of America Securities-Merrill Lynch Research.

"The equity rally has been narrowly led by China and tech stocks. We have yet to see investors fully embrace cyclical regions such as Japan or Europe, or Western bank stocks," he said.

Global emerging markets led by China and technology stocks are the strongest engines behind the early recovery. Investors are tending to be overweight emerging markets rather than any other region. Over a third (33%) of respondents prefer to overweight emerging markets although investor consensus is to remain underweight the US, the eurozone, the U.K. and Japan.

Technology remains the number one sector with 28% of the global panel overweight the industry. Industrials and materials lag with global fund managers holding 11 percent and 12 percent overweight positions respectively.

Global fund managers remain concerned about the sector, holding a 10% underweight position. Investors in emerging markets are positive about banks with 17% of fund managers in the survey overweight bank stocks.

Some of these sectoral and regional imbalances are starting to erode. Global fund managers have scaled back their underweight positions in bank stocks from 20% in July.

Industrials and materials have recovered from underweight positions in July. In July 30% of respondents wanted to underweight the eurozone. That figure has dropped to only 2% in August.

In Europe 66% of respondents said they expect the European economy to improve in this year, up from a net 34% in July.

The net percentage expecting earnings per share to rise nearly trebled, reaching 62% compared with a net 23% a month ago. Investors in the region took an overweight position in basic resources, a cyclical sector and radically scaled back their overweight position in pharmaceuticals, a defensive sector.

European growth optimism has finally caught up with other regions although fund managers have yet to act on this. Cash levels have increased and overall sector conviction is near record lows.

The survey covered 204 fund managers, managing a total of $554 billion. The survey was undertaken August 7-12. A total of 177 managers, managing $370 billion, participated in the regional surveys. The survey was conducted by Banc of America Securities - Merrill Lynch Research with the help of market research company TNS.