| LONDON, July 15
LONDON, July 15 Global investors betting on a
pickup in economic growth in the second half of 2014 have driven
equity overweight positions to three-year highs, a closely
watched survey showed on Tuesday.
According to Bank of America Merrill Lynch, which polled 179
managers controlling assets of $524 billion for its global
survey, close to two-thirds of investors are overweight in
equities, more than at any time since early 2011.
Investors typically increase their exposure to stock markets
when they feel optimistic because a more buoyant economy is
usually good news for corporate earnings and, by extension, the
valuation of company shares.
The survey found that 69 percent of investors expect the
world economy to strengthen over the next year.
But with higher economic growth comes greater expectations
of a common side-effect - rising prices. More than 71 percent of
investors said they expect inflation to be higher in 12 months'
time, up 13 percentage points since last month.
"All the optimism that's there on the growth outlook is
feeding into the inflation outlook now," said Manish Kabra, a
European equities and quant strategist at BofA.
In spite of the upbeat mood, investors continue to hold high
levels of cash - on average 4.5 percent of their portfolios in
July - which is sharply higher than levels considered normal of
less than 4 percent.
BofA attributes this in part to a "structural" legacy of the
2008-2009 financial crisis when many investors converted large
parts of portfolios out of financial assets to protect against
extreme market slumps.
Nevertheless, while equity allocations are high, more than a
fifth of investors worry stock markets are now overvalued and
possibly due a correction - the survey's highest reading since
The biggest risk worrying investors is geopolitical crisis
following tensions in the Middle East and between Russia and
Ukraine, the survey found, while concerns highlighted in
previous months, such as debt defaults in China, are easing.
Not all regional equity markets share the high expectations
of global investors, however. Allocations to euro zone equities
fell to 35 percent overweight, from 43 percent overweight in
European stocks' fall from favour is benefiting Japanese
equities, in which 26 percent of investors are now overweight -
the highest allocation for five months, the poll showed.
British stocks are also losing popularity, with 8 percent of
investors now underweight compared with 4 percent a month ago,
while allocations to U.S. equities are unchanged at 10 percent
Some 30 percent of investors think European peripheral debt
is the most crowded trade, down from 39 percent, while U.S. High
Yield is too packed, according to 36 percent.
A hunt for yield at a time of historically low interest
rates has pushed investors into assets once deemed too racy for
many, sending yields to record lows in countries once at the
centre of the euro zone crisis such as Italy, Spain and Ireland.
U.S. high-yield debt, meanwhile, is yielding less than
emerging market debt, even though the latter's average credit
rating is lower.
(Reporting by Chris Vellacott; Editing by Hugh Lawson)