Risk Is Back as Fund Managers Turn Bullish on Equities

Risk Is Back as Fund Managers Turn Bullish on Equities
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While bonds have been the asset class of choice this year, equities are quickly gaining favor among global asset managers as central banks pump liquidity into the financial system and investors grow less fearful of the euro zone debt crisis.

A monthly survey by Bank of America/Merrill Lynch showed 24 percent of fund managers are overweight equities — the highest in six months — rising from 15 percent in September. The survey of 200 managers, who oversee a combined $561 billion, was conducted over Oct. 5-11.

European and emerging market equities have been the biggest beneficiaries of the shift in risk appetite, the survey showed. The percentage of participants bullish on emerging markets, for example, rose to 32 percent in October from 19 percent in the previous month — the biggest monthly rise in eight months.

Roman Scott, chairman of investment management firm Calamander Group, said the investment case for equities is getting stronger given the liquidity boost provided by policymakers in the West.

"This very blunt tool of monetary policy to effectively keep money very cheap, in fact almost free, is designed to force all of us into risk assets. (Federal Reserve Chairman Ben) Bernanke wants everybody to buy equities and risk assets; the European Central Bank wants the same thing. I do think there's a good case that the risk-on position is looking more attractive, " Scott told CNBC.

The improvement in investor sentiment has been reflected in the MSCI Emerging Markets Index and the FTS Eurofirst 300 Index, which have risen 8.8 percent and 6.7 percent, respectively, over the last three months. (Read More: Is It Too Late to Buy European Stocks? )

Graham Bibby, managing director, CEO, and CIO of Richmond Asset Management, an investment advisory firm said he has turned bullish on emerging markets in Asia, including China — the region's worst performer — which is down over 4 percent since the start of the year.

"Asian equities will start to perform better as some people start taking profits out of the U.S. I'm interested in China and India, those markets have underperformed, but they have started to breakout to the upside and that's an indicator that the smart money is moving in, " Bibby said.

"When we look at momentum — or which markets are rising the fastest — Asia's picking up steam, " he added.

When asked how more exposure to riskier assets would be funded, the majority of respondents or 37 percent, said they would sell government bonds to do so. Fund managers, however, were much less willing to let go of their corporate bond holdings to buy up higher beta plays, according to the survey.

Meantime, optimism around U.S. equities fell for the fourth straight month, with just 10 percent of investment managers overweight the country's stocks, compared to 13 percent in September.

While U.S stocks have outperformed this year, with the Dow Jones Industrial Average hitting a near five-year high earlier this month, experts say future gains could be limited due to investor nervousness about upcoming third-quarter corporate earnings and profit-taking.

—By CNBC's Ansuya Harjani