Merrill Lynch Fund Manager Survey Finds Sentiment Edging Back From the Brink
NEW YORK and LONDON. — Investor sentiment has stepped back from the brink of despair, but more than a third of investors want to see greater fiscal stimulus, according to Merrill Lynch’s Survey of Fund Managers for December.
While 88 percent of the panel believe that the world economy is in recession, December’s survey contains evidence that the rate of deterioration is slowing. The net balance of investors who expect the global economy to worsen in the coming year has fallen to 36 percent, down from 60 percent in October. More than a quarter of respondents believe the economy will strengthen in 2009. Cash levels average 5.5 percent, up from 5.1 percent in November, the highest level since 2001. Furthermore, a widespread perception exists that stocks are cheap, both in absolute terms and relative to bonds.
The proportion of investors who view monetary policy as too restrictive has tumbled to 29 percent from 68 percent in October. However, 37 percent of investors believe that fiscal policy is too restrictive, suggesting further stimulus dollars are needed before investors will commit cash. “Market sentiment, high cash levels and the prospect of U.S. fiscal stimulus in January point to a possible New Year rally in equities,” said Gary Baker, head of EMEA equity strategy at Merrill Lynch. “It suggests that going into 2009 with textbook defensive positions in a small number of sectors could be dangerous.”
Preference for Bonds and Big Four Equity Sectors
For the third successive month, a majority of fund managers believe equities are undervalued. But survey data also suggests that they view equities with scepticism. Many fund managers still prefer bonds to stocks, with a net 21 percent of asset allocators overweight bonds in December, compared with 7 percent in November. Problems could be in store for those who stay heavily invested in fixed income. Following the recent sharp rally in government bonds, a net 42 percent believes the asset class is overvalued.
Faced with lower growth and inflation, investors have further increased overweight positions in four global sectors: Healthcare, Telecoms, Utilities and Consumer Staples since November; 44 percent of asset allocators are overweight Pharmaceuticals and 33 percent are overweight Consumer Staples.
Europeans Trimming Defensive Positions
European investors are showing signs of fatigue towards defensive stocks as they start to take profits in classically-defensive sectors. The regional Fund Manager Survey shows that Europeans are scaling back overweight positions in three defensive sectors in December. Respondents reduced overweight positions by 15 percent in Healthcare, by 11 percent in Food & Beverage, and by 8 percent in Utilities.
They are yet to commit, however, to more cyclical industries that could be poised for a 2009 rally on any positive news.
“Without any fresh allocations to the deep cyclical sectors, investors could be caught wrong-footed and miss out on a potential bounce back in commodity prices and additional fiscal stimulus targeted at infrastructure,” said Karen Olney, lead European equities strategist at Merrill Lynch. “If the world economy has just experienced a heart attack, infrastructure spending could be the defibrillator that charges it back to life.”
A net 47 percent of global asset allocators say that oil is now undervalued after falling in price by more than 60 percent in three months. However, investors in Europe have continued moving out of Basic Resources and Oil & Gas. A net 40 percent of respondents are underweight Basic Resources, a far cry from its net overweight of 36 percent in June.
Investors are instead putting their money into sectors they deem to offer relative value. The proportion of respondents who overweight insurance, the cheapest sector in Europe, jumped by 27 percent up to a net 29 percent. Telecoms, also among the cheapest sectors in the region, is closing on its all-time high in terms of popularity. A net 58 percent of European respondents are overweight the sector, up from 45 percent in November.
Emerging Market Allocations Reach Seven-Year Low
Equity allocations towards emerging markets have fallen to their lowest level since 2001. A net 17 percent of global asset allocators are underweight emerging market equities compared to a net 6 percent in November.
“It would now be a major surprise for global fund managers if emerging markets were to outperform U.S. equities in 2009,” said Michael Hartnett, chief emerging markets equity strategist at Merrill Lynch.
China remains by far the preferred choice of Asian equity investors and emerging market specialists. A net 50 percent say they would want to overweight Chinese equities; this is despite the fact that eight out of 10 fund managers expect the Chinese economy to slow in 2009. “Ironically, the slowdown is indirectly making investors more bullish on China, thanks to the promise of policy stimulus and falling commodity prices,” said Mr. Hartnett.
A total of 196 fund managers participated in the global survey from December 5 to December 11, managing a total of U.S. $582 billion. A total of 168 managers participated in the regional surveys, managing U.S. $379 billion. The survey was conducted with the help of market research company Taylor Nelson Sofres (TNS). Through its international network in more than 50 countries, Taylor Nelson Sofres provides market information services in over 80 countries to national and multinational organizations. It is ranked as the fourth-largest market information group in the world. Survey results were analysed by David Bowers, who is joint managing director of Absolute Strategy Research Ltd, a financial services consultancy.
Merrill Lynch Global Research has consistently achieved high rankings for its equity and fixed income research in numerous regional and global investor surveys, such as Institutional Investor, The Wall Street Journal, LatinFinance, Asiamoney, Euromoney, Extel and Reuters.
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