By Natsuko Waki
LONDON, April 17 (Reuters) - For long-term asset managers who missed the "green shoots" equity rally over the past six weeks, the big question is how much of the current rally they can miss before committing themselves to the upturn. It has become a "pain trade" for some long-term investors as they, in fear of compounding last year's losses, have stuck with underweight equity positions just when world stocks have rallied nearly 30 percent since hitting a six-year low in March.
But these investors now face the choice of either missing even more gains or, possibly worse, diving in just as the rally fizzles. The direction next week hinges on a slew of first-quarter earnings reports from major banks and corporates as well as a closely-watched manufacturing survey.
Even banking stocks, which have been a no-go sector for long-term investors -- have more doubled since early March, leading many to think that green shoots of recovery have finally arrived. Others stick with the view that this is just a rally within a bear market.
"Investors are fairly poorly positioned to play this rally. Apocalyptic fears have been removed but there is no bullish euphoria yet," said Gary Baker, international investment strategist at Banc of America Securities-Merrill Lynch.
"Although they haven't fully embraced the idea that the worst is over, fund managers can't wait any longer to be proven wrong. It has become too painful for fund managers to sit on their underweight positions (on banks), watching these things double."
Institutional investors have slowly started cutting underweight positions in risky assets.
State Street's cross-border equity flows data shows the United States saw monthly flows soar into 98th percentile of previous history last week, meaning flows were only higher on 2 percent of prior months in the past 12 years.
"It seems the nightmare may now be ending," the bank said in a note to clients.
"Institutional investors have welcomed the onset of quantitative easing in the UK and U.S. The start of these efforts to expand the monetary base coincided with both the market rallies and the marked uptick in cross-border equity flows."
Data from EPFR shows net flows into equity funds in Asia outside Japan and Eastern Europe and the Middle East moved into positive territory, in a sign that investors are regaining appetite over riskier emerging market assets.
However, overall flows into all equity funds remained negative at $1.4 billion in the week ending Wednesday.
BACK INTO CYCLICALS
Merrill Lynch's monthly fund managers survey showed a move back into the banking sector unlocked a widespread shift out of defensive sectors into cyclicals.
Managers cut their underweight positions in banks this month to 26 percent from a record 48 percent in March. Technology is now the most popular sector globally.
"What is happening suggest that investors have added to risk by buying some of the cyclical markets -- resources, some industrials," said David Shairp, global strategist at JPMorgan Asset Management.
Dirk Wiedmann, head of investments at Rothschild Private Banking & Trust, likes a broadly neutral asset allocation, while he is upbeat on the longer-term outlook for hedge funds and commodities -- alternative assets which have suffered severely over the past year.
He cites that redemptions for the first quarter at one major hedge fund has been only around 20-30 percent of the levels seen in the fourth quarter.
"For the skilled managers that survive, the medium and long term prospects are good. There is a large opportunity set and there will be less competition. There are already good opportunities for global macro and directional trading strategies," he wrote in a note to clients. (Additional reporting by Jeremy Gaunt; Editing by Andy Bruce)