NEW YORK (Reuters) - The world's wealthiest investors, after cautiously dipping their toes back into financial markets last year, are expected to wade back into emerging markets and seek out high-yielding large company stocks.
In 2009, millionaires moved some of their cash off the sidelines in favor of predictable though thin returns of fixed-income investments, according to the latest Merrill Lynch-Capgemini world wealth report. By the 2009 second half, the rich had regained some appetite for risk, shifting money from home regions toward developing countries with growing economies and higher returns, the report said.
Now, wealthy investors are balancing worries stoked by the 2008 financial meltdown with a desire to find ways to recoup their losses.
"Some people have enough resources that they can put their toe in. Others are probably up to their knees," Merrill Lynch U.S. wealth management chief Lyle LaMothe told reporters at a briefing on Tuesday. "It's still cautious. No one is jumping in wholeheartedly."
In the wake of the financial crisis that hobbled banks and wiped out trillions of dollars of wealth, investors fled to the relative safety of bonds. Globally, 31 percent of millionaire portfolios were tied up in fixed income last year, compared with 25 percent in 2008.
By the end of 2009, stocks and hedge funds had surged from crisis lows, helping millionaire investors globally to nearly regain their previous peaks in wealth. In Asia and Latin America, the wealthy set new highs.
In the coming year and a half, funds are expected to slowly flow back into emerging markets and certain sectors of the stock market.
Last year's homeward bound trend has been reversed, and more money has been chasing returns in hot markets like China, India and Brazil, according to the report. The global economy is expected to grow this year and in 2011, driven mostly by the emerging markets.
The flight to quality is also turning around.
Global equity allocations are expected to increase to 35 percent in 2011 from 29 percent in 2009. the report said, while fixed income holdings will remain little changed at 31 percent. Cash holdings, strangled by near-zero interest rates, are expected to slip to 13 percent from 17 percent.
Real estate holdings globally are seen falling to 14 percent in 2011 from 18 percent in 2009, while hedge funds and other alternative investments will climb back to 8 percent from 6 percent -- the biggest slice of money devoted to these funds since 2007.
These asset allocations vary by region. North American investors favor stocks, while Latin American and Japanese millionaires hold half their money in cash and bonds.
Many of the investors surveyed expressed interest in large-company stocks paying generous dividends -- especially those found in developing nations.
North American investors, for example, are expected to reduce domestic holdings to 68 percent of their total holdings from 76 percent, and increase the allocation to emerging Asia-Pacific to 12 percent from 7 percent.
"The Asia-Pacific region, excluding Japan, will surpass Europe in 2011 as a high-net-worth investor destination," LaMothe said.
Reporting by Joseph A. Giannone; editing by John Wallace