Merrill's Survey Shows Investors Gloomy On Recession

Sydney, Nov 27, 2008 (ABN Newswire) - World stockmarkets are now pricing in a very severe recession for 2009.

Canada looks like it has joined the major economies like Japan, UK, Italy, Germany and the rest of the eurozone in recession (but not France, it seems).

The US is sliding rapidly with Goldman Sachs upping its forecasts for the current quarter to an annual contraction of 5%, plus falls of 2% in the March quarter next year and 1% in the June quarter.

Singapore is expecting 2009 to be worse.

The second reading of the US GDP figures for the third quarter said the economy was down 0.5%, worse than 0.3% from the first reading.

Other forecasters say they see the Us remaining in recession for most of next year.

In its monthly survey of some of the world's major fund managers, Merrill Lynch has found that investors remain unconvinced that a spate of policy measures from governments and central banks can combat global recession, and are retaining defensive positions.

According to Merrill Lynch's Survey of Fund Managers for November, four out of five investors believe that the world will continue to experience recession over the coming year.

Policy makers have offered fiscal stimulus packages, liquidity and interest rate cuts, but investors are not yet ready to give their policies the benefit of the doubt.

Forty percent of the panel still believe that monetary policy is "too restrictive" and asset allocators remain overweight cash and bonds relative to equities.

"Investors remain embedded in a defensive asset allocation mindset. Many acknowledge the global policy response seen in recent weeks, but fear of deflation may be keeping them on the sideline," said Gary Baker, head of EMEA equity strategy at Merrill Lynch.

"This could start to look risky as the determination of government fiscal responses allied to further monetary easing starts to play through into sector preferences," he said.

US and Chinese Equities Favoured Despite Economic Outlook; Japanese Yen "Overvalued"

Global equity markets continue to struggle with high levels of risk aversion and currency market volatility. The November survey showed investors believed the Japanese yen was "overvalued" for the first time in over five years.

"The yen is a global barometer of risk appetite. Its strength is a sign investors remain very risk averse," said Michael Hartnett, chief emerging markets equity strategist.

Equity investors are turning to US equities, where the outlook for corporate profits is the "most favourable": a net 36% of asset allocators are overweight US equities, the most widespread exposure to US stocks in more than a decade. In contrast, asset allocators are underweight European and Asian equity markets.

Concern at the macro economic outlook of China was evident.

A net 85% of panellists who focus on Asia or emerging markets expect the Chinese economy to weaken in the next 12 months.

At the same time, Asian and emerging market investors favour China over any other country in their universe and have been moving into the market in force.

A net 67% of regional respondents are overweight Chinese equities, up from an underweight position just three months ago.

"China is currently seen as the sole Asian beneficiary of policy stimulus and falling oil prices," said Mr. Hartnett.

Rate Cuts Fail to Lift Gloom Over Europe

Action by the European Central Bank and the Bank of England to cut interest rates has failed to lift either the sense of pessimism about Europe's economy or prospects for the region's equities. The eurozone is at the bottom of the list of regions that investors would most like to overweight.

In spite of policy measures, a gross 89% of investors expect Europe's economy to be in recession in the next 12 months, up from a gross 23% in June.

Furthermore, a net 58% still say that Europe's monetary policy is too restrictive, suggesting a focus on rapidly slowing growth, rather than inflation.

In June, more than half believed that inflation would be higher over a 12-month period. However, in November's survey, 92% of panellists expect inflation to be lower 12 months from now.

"Amid a determined search for growth, investors are apparently turning a blind eye to the risk of inflation," said Karen Olney, lead European equities strategist at Merrill Lynch. "In just five months, investors have performed a U-turn on the issue. At some point, the scale of monetary, credit and fiscal stimulus injected globally could put this view at risk."

Defensive Stance Intensifies

Against a background of unprecedented market volatility, European investors have made big changes to their asset allocations over the past month, delivering a textbook recessionary asset allocation.

European asset allocators are overweight Food & Beverages for the first time in the history of the survey.

A net 47% of the panel is now overweight the Healthcare/Pharmaceutical sector, with investors moving out of cyclical sectors such as Basic Resources and Chemicals. "Taking such a defensive stance could be costly. We believe it is time to start neutralising some defensive positions," said Ms. Olney.

"We have decided to take profits on Pharmaceuticals following their relative outperformance of 60 percent since June. We have also raised Basic Resources to overweight, reflecting good tactical value."

A total of 180 fund managers participated in the global survey from November 7 to November 13, managing a total of US $536 billion.

A total of 149 managers participated in the regional surveys, managing US $334 billion. The survey was conducted with the help of market research company Taylor Nelson Sofres (TNS).


 

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