Merrill Lynch survey reveals investor risk appetite returning

Risk appetite among fund managers and investors has started to pick up on the back of improving global economic sentiment, tentative signs that the worst of the global financial crisis may be behind us.

This was one of the key findings from a global survey by Merrill Lynch of fund managers conducted in April, which showed that optimism about growth in financial markets had reached its highest level since early 2004.

The survey also revealed that investors believed the worst of the sub-prime disaster had washed through the markets and investors were now more confident to act on the improving outlook by unwinding what had previously been entrenched bearish positions.

According to the survey, investor pessimism on bank stocks has started to recede, with the net percentage of respondents underweight in banks having swung to 26 per cent in April, dropping from 48 per cent in the previous month. The net percentage of investors overweight in cash dropped to 28 per cent from 41 per cent in March, with 17 per cent of survey respondents underweight in equities compared to 41 per cent in March.

“Improving sentiment on financials has decisively removed the log jam on sector rotation,” said Bank of America Securities-Merrill Lynch Research co-head of international investment strategy Gary Baker. “This is enabling broader optimism about growth to feed into greater risk appetite and prompting a march out of defensives into cyclicals.”

Bank of America Securities-Merrill Lynch Research co-head of international investment strategy Michael Hartnett agreed, saying the consensus had shifted from “apocalyptically bearish to reluctantly bullish”.

“It’s important to note that asset allocators are still underweight equities, indicating they have yet to fully embrace the idea of a new bull market,” Hartnett said.