Risk appetite lowest in 30 months

The willingness among people who manage large amounts of capital to take risks is at its lowest in around two-and-a-half years.

Fears of a European banking crisis have forced fund managers to cut bets and their cash levels.

An indicator of risk appetite from global financial major Bank of America Merrill Lynch has fallen to levels last seen in March 2009, according to a global fund manager survey from the firm authored by analyts Gary Baker and Michael Hartnett and dated September 13, 2011.

The risk aversion comes as global sentiment is hit by fears that a default by Greece will adversely affect European banks which have an exposure to the country.

The survey suggests that one in three respondents are overweight on cash or holding capital with themselves rather than investing it.
Average cash balances are at 4.9%. Though this is lower than the 5.2% last month, ‘the current reading remains extreme’, said the report.

The duo suggest that this may be a good time to buy if one has faith in policy makers.

“Risk appetite seems to be at rock-bottom and our cash rule gives a “buy” signal. Markets would rally on better-than-expected policy initiatives but investors are struggling to see what these could comprise ,” they said.

Any deterioration in the economic backdrop will affect emerging market stocks and commodities the most, said the report.
While overweight on cash, fund managers are also underweight on equities for the first time since since May 2009.

Hedge funds slashed net exposure to equities to a net 19% as opposed to 33% last month, the lowest level in 15 months.

However, fund managers remain overweight on emerging markets, according to an emerging market fund manager survey by Bank of America Merrill Lynch also issued on Tuesday.

The proportion of fund managers who are bullish on emerging markets has risen from 27% last month to 30% now, said the report authored by Michael Hartnett, Kate Moore and Brian Leung.
Global fund managers have reduced the level of their underweight positions on India too, according to the survey.

Experts feel that India may get cheaper if the global situation worsens.

Manish Sonthalia, fund manager at Motilal Oswal Asset Management points out that India is still trading at relatively higher valuations compared to some of the other emerging markets.

“In the near term, Indian markets would move in line with the European markets. There has been large portfolio outflows leading to significant currency depreciation as Indian markets are still trading at relatively higher valuations compared to some of the other emerging markets,” he said.

The BSE’s Sensex, an index whose performance is seen to be representative of the broader market, has lost 4041.65 points or 19.7% since the beginning of the year.

Foreign institutional investors have been net buyers by Rs1,363 crore in September, after being net sellers by Rs9,536.50 crore in August, according to the latest Sebi data.

Prashastha Seth, Senior Fund Manager at IIFL Wealth feels that currency depreciation and persistently high crude prices could act as a drag on India which imports more goods, primarily oil, than it exports.

“The road ahead doesn’t look good at all as there are concerns on global front with global economy in a bad shape. Also the way crude and currency are trading at the moment, the current account deficit situation may get worse for India,” he said.

The rupee has hit a 15-month low at Rs47.60 against the dollar, making it more expensive for the country to pay for its imports.
Any positive triggers would have to come from policy makers feels Sonthalia.

“Going ahead, the pace of reforms and moderation in central bank’s stance on interest rate hikes would likely act as positive triggers. Also we may witness some inflows once the currency forms a panic bottom,” he said.