Institutional investors drawn to US and emerging equities in 2012

Institutional investors, anticipating low growth and low inflation in 2012, are repositioning portfolios to benefit from better growth momentum in the US and emerging markets than in the eurozone.

2012 will be a below-trend growth and below-trend inflation year, according to over 60% of 190 institutional investors representing $608bn of assets under management.

Participating in BofA Merrill Lynch’s December survey of fund managers, half of the respondents said the outlook for corporate profits is most favorable in the US and the majority (72%) named the eurozone as having the least favorable outlook for corporate profits. They added that the dollar will strengthen and the euro weaken in 2012.

Some asset allocators dipped into cash reserves to make an end-of-year move into equities with the US their preferred destination, survey results demonstrated, with 8% of asset allocators overweight equities this month, compared with a 5% underweight in November. Equity positions were only increased in the US.

“With improving growth prospects, US equities are seen as a popular destination and a refuge from turmoil,” said Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.

Gary Baker (pictured), head of European equities strategy at BofA Merrill Lynch Global Research, added that “investors are slightly more optimistic about equities but retain a defensive approach, so that means reduced European exposure and a preference for counter-cyclical stocks.”

Reduced European exposure reflects investors’ uncertainty over the future of the eurozone. Nearly half of respondents said no member state will exit the euro in 2012 or the foreseeable future.

Another 24% said they expect one of the 17 member states to leave the euro in the first half of 2012, 45% expect a member to depart in the foreseeable future while 7% remain undecided.

Defensive positioning with increased allocations to pharmaceuticals and staples has taken precedence over the past month. Pharmaceuticals took over as the most popular global sector with 36% of respondents holding an overweight position, up from a 31% in November.

Investors reduced exposure to growth and cyclical sectors including technology, industrials and discretionary, the survey showed. In industrials and discretionary, respondents were extending already underweight positions.

Institutional investors also highlighted that liquidity conditions have nearly receded to 2009 levels. In October, 4% described liquidity conditions as positive. At the beginning of 2011, more than 50% described market conditions as positive. At the height of the credit crunch over 60% described conditions as negative.

The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS.

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