See clear investor preference for emerging markets: BoA ML

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In an interview with CNBC-TV18, Gary Baker, Head of European Equity Strategy at Bank of America Merrill Lynch spoke about the findings of the BofA Merrill Lynch Fund Manager Survey.

Below is a verbatim transcript of the interview. Also watch the video.

Q: What does your survey have to say about US and global growth right now? Are there still fears of a double dip recession in the minds of the investors you polled?

A: I would say progressively over the past three-months we have really seen fears of double dip really disappear almost. We have now got very high expectations. A large number of investors are saying that they believe growth will be strong next year - the recovery will actually happen. So you have got less than 10% of investors now thinking that there is a chance of a double dip within global economy over the next 12 months.

Q: What kind of assets do you think are favoured as we go into the first half of 2010?

A: That is what the interesting thing is because the optimism on economic growth is also now translating into optimism on corporate profits as well. So both of those measures are quite high and that is leading them to be quite overweight equities within asset allocations. The largest overweight is equities. They are quite significantly underweight bonds and they have taken bond weighting down further over the past months.

Now the other biggest areas they have raised weightings over the past months has been into commodities. So you have got slightly inflation hedge perhaps being build in to asset allocations going forward.

Q: So, equities according to you are clearly the preferred asset class and emerging market equities more attractive at this point in time as compared to US equities?

A: No, the clear preference is still very much emerging markets. It is by far the largest overweight between the regions. Current allocations at plus 54 for emerging markets, the next highest would be euro something like plus 15. So there is a very large gap between relative preferences. That said, asset allocators now are also saying that they are overweight US. So the pecking order seems to be emerging markets, then euro, then the US. The largest underweight by far is Japan.

Q: What does your survey say about the Dollar Index now? Will it fall further and if yes then against which currencies will the dollar fall most?
A: It is quite a complicated answer because we asked several questions on currencies. We asked different asset allocators, global investors, regions investors in terms of their currency views. But putting it altogether, essentially, investors are becoming more optimistic now that perhaps we have seen low point on the dollar.

So you have got a larger number of investors - something like net 20% of investors now think that the dollar looks under valued. Now although that is sort of encouraging trend perhaps for the dollar, we have still seen that those levels go much lower before you actually see any movement in the dollar exchange rate.

So while the trend is slightly better for the dollar, I wouldn't say definitively from this survey that it has really seen a low point on it.

In terms of where they see currencies over valued - then the clear over valuation is on the yen and also the euro. But we also asked them, which currency do you think will appreciate or depreciate over the next 12 months? There, they were a bit subdued or confused as to what the outlook is.

So the euro and dollar they don't see great deal of movement but the yen is the clear currency that they can get over valued and will depreciate over the next 12 months.

Q: There are two scenarios where the dollar can reverse and start surging again. One is when the Fed hikes rates because of inflation fears, and two is when investors lose appetite for US Treasuries. Did your survey indicate when investors expect either of this?

A: Some of the data we just have to interpret - you cannot actually find what someone was thinking when they filled that answer - but I would say there was one new question we asked this month in the survey is asking investors on a date when they thought the Fed would be raising rates for the first time. The clear answer - more than 75% of investors see no change in Fed rates before the second half of next year. One in six investors don't see any change before 2011.

So there is still a very sanguine attitude as to how fast the Fed will be hiking rates and that is probably testament to Fed itself. They put out a very clear message trying to convince people don't expect any rapid rate rises.

On the issue of where the treasury yields are going - given the determination of Fed to hold rates down for longer than people might imagined, then it is leaving people slightly uncertain as to how quickly other treasuries might see yield increases. But the overall stance on treasuries is negative one. So people are thinking, "This isn't a great entry point for bonds generally, even though I might not know when they actually start to deteriorate. Generally, I still want to be pro-equities and more negative on bonds."