Fund Managers Turn Bullish As “Risk Appetite” Increases

by on February 2, 2012 | ETFs Mentioned:

Although uncertainty continues to linger across financial markets, investors’ confidence in the global economic recovery has without a doubt improved considerably going forward, shaking off much of last year’s pessimism. Debt negotiations in the Euro zone have played a key role in ensuring stability, while better-than-expected economic data releases on the home front have helped to reignite optimism. According to a recent survey by Bank of America, global investors have started 2012 with fairly bullish prospects and greater appetite for risk [see also 12 Rapid Fire ETF Ideas For 2012].

The Bank of America Merrill Lynch Fund Manager Survey, which was conducted earlier in January of this year, shows that of the participating 214 institutional investors, reveals that few are predicting a global slowdown.

Bullish Sentiment Is Building

The survey revealed that only 3% of the participants believe economic growth will weaken in 2012; this is a drastic improvement from sentiment in December 2011, when 27% of fund managers feared a global slowdown. Gradually falling cash levels have been a key indicator to confirm the brewing optimism as investors are taking baby steps to tweak their portfolios in anticipation of stronger growth [see 2012 ETFdb Portfolio].

U.S. stocks remain as the preferred asset class as looming Euro zone debt woes continue to plague confidence overseas. Investors have been increasing their exposure to domestic stocks amidst the growing optimism; 28% of the survey participants are overweight U.S. stocks, which is a considerable improvement from December when the figure stood at only 23% [see also How To Invest Like UBS In 2012].

Chief Global Equity strategist at BofA Merrill Lynch Global Research, Michael Hartnett, commented, “Investors are tip-toeing rather than hurtling toward higher risk exposure; the U.S. market and high quality cyclical sectors, such as energy and tech, have been the main beneficiaries of lower cash holdings”.

Other key points from the survey include:

  • Technology has regained its status as the most favored global sector; 39% of investors are overweight tech, versus 31% in December.
  • 56% of the global panelists believe that the outlook for corporate profits is more favorable in the U.S. than any other region, up from 50% last month.
  • U.S. fund managers are returning to banks; investors who are underweight banks has fallen to 16% from 32% in December, showcasing a significant improvement in the outlook for the beat down financials sector.

Ways To Play

Investors looking to favorably position themselves in anticipation of economic prosperity over the coming year have a toolbox of instruments to choose from. Those who are interested in tapping into the tech sector have a big list of Technology Equities ETFs to choose from; the State Street Technology Select Sector SPDR (XLK) is by far the biggest product in the space, while the iShares S&P Global Technology Index Fund (IXN) is a popular chose for investors looking to add international exposure [see High Tech ETFdb Portfolio].

Those who are brave enough to dip their toes back in most beat down sector can choose from 40 products from the Financials Equities ETFdb Category. Some of the more popular ETFs include XLF, KBE, and VFH; investors who wish to focus on regional banks, believing this corner of the market offers an attractive risk/return profile, may opt for the SPDR KBW Regional Banking ETF (KRE).

Some investors may wish to take a more broad-based approach when increasing their risk appetite. Below we profile three ETPs with appealing upside potential that could serve as tactical instruments for those with a stomach for risk:

  • UBS ETRACS Fisher Gartman Risk On ETN (ONN): This ETN tracks an index which consists of a mix of long and short positions in various asset classes whose overall value is expected to rise when the outlook on markets and the broader economy is positive and to decrease when such outlook is negative. ONN is essentially made up of long positions in various risky asset classes, such as stocks and commodities, and short positions in traditional safe haven investments, such as sovereign bonds [see ONN Fact Sheet].
  • Russell Small Cap Aggressive Growth ETF (SGGG): Those who are looking to capture eye-popping returns over the coming year may wish to consider this small cap-focused ETF which is intended to produce performance results that are similar to professional investment managers using an aggressive growth investment discipline [see Small Cap ETFdb Portfolio].
  • PowerShares S&P 500 High Beta Portfolio (SPHB): This ETF could serve as a useful tool for bullish investors who are simply looking to profit from directional swings in the broad equity market. SPHB consists of the 100 stocks from the S&P 500 Index with the highest sensitivity to market movements [see SPHB Holdings].

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Disclosure: No positions at time of writing.