Confidence has returned to the markets, but what does that mean for investors?
Well aren't we a happy bunch! Six months ago we thought the world was going to grind to a halt. Now seven out of 10 of us expect the world economy to improve in the next 12 months, and a net 18% expect corporate profits to improve*.
That figure is from Merrill Lynch's latest Fund Manager Survey, which polls 220 fund managers around the world, managing a total of $617bn in assets.
According to their figures, cyclical stocks -- the sort that will do better in a recovery, such as retail and industrials -- are now preferred to the 'safer' defensives such as utilities and pharmaceuticals.
Emerging markets are back in vogue too, while "bullishness about China's economy has reached its highest level since the survey began tracking China in 2003". A net 61% or respondents expect the Chinese economy to improve, compared to a net 87% who expected it to weaken just six months ago.
Other confidence measures
Other confidence measures seem to be indicating a similar trend. Just last week, Bloomberg's Professional Global Confidence Index registered its biggest increase since the survey began in November 2007, although it still showed pessimists outnumbering optimists.
German investor confidence also hit a three-year high last week, with a general feeling that the worst of the recession has passed.
In the United States, the State Street Investor Confidence Index, which measures institutional investors' buying and selling patterns, rose in April to its highest level since last July. May's numbers are due out on Tuesday.
What does it all mean?
Despite the near 3% fall in the FTSE on Thursday, it has risen 25% since the start of March, so the big question, at least in the short term, is to what extent this confidence is already reflected in the market.
According to the Merrill Lynch data, net cash positions among fund managers have fallen from 4.9% to 4.3% over the past month, so they've used up some of their fire-power, but still have more in reserve.
Slightly more managers claim to be underweight in equities than overweight, which seems to indicate that while they are more optimistic and have dripped some cash back into the markets, they expect to do some more buying.
Without getting into the arguments around the efficient market hypothesis, it seems logical that there would be time lag between feeling more positive about the market and actually buying into it. On that basis, the rally may have further to run.
Longer term, the question is not so much whether the confidence is already priced in, but whether it turns out to have been justified. According to Merrill's Michael Hartnett, "this rush to take on risk, especially in emerging markets, is reminiscent of bubble-like behaviour. A record net 40 percent of fund managers are looking to overweight the region in the next 12 months."
Given the continuing need for funds by many companies, I'd expect to see more rights issues and bond issues taking advantage of this improved sentiment, and possibly mopping up some of this increasingly available cash while they can.
What a difference a few months can make.
More from Padraig O'Hannelly:
* These net percentages sometimes cause confusion; they are 'total for minus total against', so a net 18% means 59% expect an improvement, versus 41% who do not.
