President Obama's first day in his new job, with Rahm Emanuel, his chief of staff, in the Oval Office. Photo: Pete Souza/The White House |
Global investor gloom has started to lift, with hopes of improving growth and inflation rather than deflation, according to the Merrill Lynch Survey of Fund Managers for January 2009.
Broad economic sentiment has improved sharply from the lows of late 2008. The Merrill Lynch Fund Manager Composite Indicator for Growth Expectations has climbed to 30 this month from 25 in December and a low of 17 in October. The proportion of fund managers who predict lower inflation has fallen to a net 64 percent from a net 82 percent in December. Accordingly, there is a growing conviction that interest rates will rise, with 35 percent of respondents who forecast long term rates to increase in the next 12 months, up from 10 percent in December. At the same time the average cash balance remains high at 5.3 percent, only marginally lower than December's level of 5.5 percent.
"Investors are talking a more positive story, especially with regards to the US, but the fear factor remains," said Gary Baker, Banc of America Securities-Merrill Lynch head of EMEA equity strategy. "They have firepower to act, but are unconvinced by the modest recent equity rally, suggesting it is a bear market rally in both sentiment and markets. Global sector allocations remain resolutely defensive."
European Cash Positions Reach Record High as Pessimism Lingers
Cash positions in Europe have reached their highest level since 2001, reflecting the high level of caution within the region. A total of 42 percent of regional respondents are overweight cash compared with 29 percent in December.
The numbers reflect how, while global economic sentiment is lightening, European expectations remain under a cloud with investors embedded in defensive positions.
Every respondent to the regional survey expects a European recession, up from 91 percent in December. Investors are worried that corporate profits will continue to disappoint. This distrust means the percentage of investors who believe that European equities are cheap has almost halved, falling to 22 percent in January from 40 percent in December. "European investors are still dancing the two-step and are reluctant to try out any more adventurous moves," said Karen Olney, Banc of America Securities-Merrill Lynch lead European equity strategist. "Investors continue to rotate between expensive defensive sectors and beaten, but not broken, industrial cyclicals that hope to piggyback on any indication of infrastructure-related spending by governments reigniting economies."
As investors flock to Food & Beverage and Pharmaceuticals, two survey records have been broken. Food & Beverage has hit its highest overweight in the history of the survey (net 11 percent of fund managers overweight). The gulf in sentiment between Banks and Healthcare sectors is also at a record high. A net 57 percent of European investors are underweight Banks while a net 46 percent are overweight Healthcare. "Pharmaceuticals are largely immune to the credit crunch and economic slowdown that has hit banks," said Olney.
Sterling is viewed as undervalued for the first time in seven years. In October, a net 58 percent of respondents viewed sterling as overvalued but this month a net 7 percent believe it is undervalued. Increasing numbers view both the euro and the yen as overvalued.
Out of US Into Emerging Markets
US equities have become less in favour with global investors. The net percentage of asset allocators overweight the US equity market fell from 25 percent in December to 7 percent in January. "There has been a notable dip in the US equity market's popularity and emerging market equities have been the new-year beneficiary of rotation away from the US," said Michael Hartnett, Banc of America Securities-Merrill Lynch chief emerging markets equity strategist. The number of investors underweight global emerging markets has fallen to 7 percent in January, from 17 percent in December.
Investors View China With Caution
In spite of flows into emerging markets, investors retain caution over China. The percentage of regional investors who expect the Chinese economy to improve has risen from 6 percent, but is still low at 10 percent. The proportion of respondents who expect Chinese growth to slow in the next 12 months has fallen to 70 percent from 79 percent in December.
"China remains the big global growth wildcard in 2009. Despite the announcement of huge fiscal stimulus packages in recent months, investors remain very sceptical about Chinese and Asian growth,"said Hartnett. "Indeed, Japanese investors notably reduced their expectations for Japan's growth to close to a record low."
A total of 205 fund managers, managing a total of US $597 billion, participated in the global survey from January 9 to January 15. A total of 167 managers, managing US $359 billion, participated in the regional surveys,. The survey was conducted by Banc of America Securities-Merrill Lynch Research 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.