Fund Managers’ Risk Appetite on the Rise

The proportion of respondents taking lower than normal risk has shrunk to 1%, down from 16% in September, according to the survey.

The higher risk appetite is evident in emerging markets. “We are seeing a vivid and extreme bent towards high-beta markets, such as Russia, and movement away from lower beta markets, such as Chile and Malaysia,” said Michael Hartt, chief global equity strategist at BofA Merrill Lynch Global Research.

Interest Rates Here to Stay

The majority of surveyed investors expect the U.S. Federal Reserve to hold off from raising interest rates until the second half of 2010. More than three-quarters of the respondents predict the Fed will raise rates in the second half of 2010 or beyond, according to the survey.

Almost half (47%) of respondents expect global core inflation to be higher in 12 months, up from 39% in October. Demand is up for assets protecting against inflation, such as gold, commodities, and emerging market equities. In fact, one-fourth of the panel is overweight commodities, up from 11% in October. More than half (53%) of the panel is overweight emerging market equities, up from a  46% in October.

“Investors see inflation as a greater risk than deflation and are hedging that risk with overweight positions in emerging markets and commodities, and an underweight position in the U.S. dollar,” Hartt said.

While 22% of surveyed global fund managers view Europe as the most undervalued global market, investors within Europe are wary of their region’s equities, the survey found. European survey respondents made substantial moves out of cyclical stocks and into defensive sectors over the past month. For instance, more than a quarter of Europeans surveyed increased their positions in Healthcare/Pharma.

A total of 218 fund managers, managing a total of $534 billion, participated in the global survey from November 6 to 12. A total of 177 managers, managing $361 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Global Research with the help of market research company TNS.