King warns on risk as investors’ appetite for it peaks

Mervyn King, governor of the Bank of England, told parliament that the economy is operating “well below” full capacity and that risk is not fully priced into the stockmarket.

Recent economic breakthroughs include a temporary resolution of the US fiscal cliff, the strengthening of the eurozone through OMT and the FTSE 100 reaching its highest level since 2008. But Mr King told the Treasury Select Committee there was still cause for concern.

“The economy is operating well below full capacity, the banking system is in a stretched position and we are clearly struggling to find instruments to ensure an economic recovery,” King told the committee, according to Reuters.

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“A combination of a weak recovery, and ... people searching for yield in ways that suggest that risk isn’t fully priced (in), is a disturbing position. It’s one that we will have to monitor very carefully,” he said.

The comments come as the Bank of America Merrill Lynch Fund Manager survey - which canvases a total of 190 managers with $586bn (£364.2bn) under management - has shown investors’ appetite for risk in their portfolios to be the highest in nine years with an increasing number judging equities as undervalued, particularly in Europe.

“Moreover, investors have reduced cash holdings to 3.8 per cent from 4.2 per cent in December,” the survey said.

“This marks the most positive reading of this measure of willingness to hold riskier investment assets since April 2011, though it has not reached levels that would represent a contrarian sell signal.”

The survey also showed asset allocators assigning more funds to equities than at any time since February 2011 while their confidence in the world’s economic outlook has reached its most positive level since April 2010.

Participants also said the US fiscal cliff remained their largest concern but it has fallen 20 percentage points in two months.

Meanwhile, 63 per cent remained “very positive” on China.