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News : Global Economy Last Updated: Aug 18, 2011 - 7:59 AM

Fund managers expect global economy will slow sharply in coming 12 months
By Finfacts Team
Aug 17, 2011 - 3:36 AM

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Investors believe that the global economy will slow sharply in the coming 12 months but will avoid dipping back into recession, according to the BofA Merrill Lynch Survey of Fund Managers for August.

A net 13% of respondents to the global survey believe that the world economy is headed for a period of weaker growth. The reading represents a significant swing since July when a net 19% were confident the economy would improve. Investors' forecast for corporate profits shows the biggest downwards swing in the survey's history. A net 30% of the panel expects the profit outlook to deteriorate in the coming 12 months. In July, a net 11% forecast an improvement in profits.

However, a net 42% of investors still hold the view that a global recession is unlikely in the coming year. The survey took place from August 5 to August 11, when world equities fell by 12.3%.

Cash holdings have soared to their highest levels since the depths of the credit crisis as investors have moved out of equities, notably cyclical stocks. Cash balances have climbed close to their high of 5.5% in December 2008. Global investors hold an average of 5.2% of portfolios in cash, up from 4.1% in July. A net 30% are overweight cash compared with their benchmark. Both numbers are at their highest level since March 2009.

Asset allocators have scaled back equity positions faster than in any previous month in the survey's history. A net 2% remain overweight equities, down from a net 35% in July. Asset allocators have also reduced their underweight positions in bonds and reduced holdings in commodities and alternative investments.

"Flows out of equities into cash have reached capitulation levels, especially in the US, but it's significant that a revival in optimism towards China has survived the global correction," said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research. "Investors are waiting for convincing, coordinated action from governments before recommitting their cash to equities," said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.

US sentiment down sharply: Asset allocators have reduced their positions in the US more aggressively than in any other region and at the sharpest rate the survey has ever recorded. Asset allocators responding to the global survey moved slightly underweight US equities. A net 1% of the panel is underweight this month, compared with a net 23% overweight in July.

At the same time, US fund managers have demonstrated a U-turn in economic sentiment. A net 14% of the US panel believes their economy will weaken, in contrast to the net 29% predicting a stronger economy in June.

The Eurozone is the one region to have avoided the global equities sell-off. The panel remains underweight Eurozone equities, but the net percentage underweight the region has fallen to 15% in August, from 21% in July. Within Europe, however, the story has darkened. A net 71% of the regional panel expects the European economy to weaken, up starkly from a net 22% in July; although, a strong majority rejects the idea that Europe will go into recession.

More positive towards China: Asset allocators have reduced their overweight position in global emerging market (GEM) equities. A net 27% of the global panel is overweight the region, a fall of 8 percentage points month on month. GEM fund managers are slightly less optimistic than a month ago, but the shift in sentiment is far less pronounced than their colleagues in the US and Europe.

That could reflect a view from GEM fund managers and their counterparts in Japan and Asia-Pacific that China's outlook is brighter. A net 11% of fund managers from these regions believe that China's economy will weaken, but that is down from a net 24% in July and a net 40% in June.

Big sale of cyclicals; gold overvalued (once more): Global asset allocators have departed cyclical stocks en masse over the past month. Allocations towards industrials suffered a negative 27 percentage point change from July to August. A net 16% of global allocators are underweight Industrials, compared with a net 11% overweight in July. The proportion of respondents overweight energy stocks declined to a net 14% from a net 27% a month ago. While a large majority of allocators remain underweight banks, the month-on-month swing in the sector was a modest 4 percentage points.

The move out of cyclical stocks reflects how three-quarters of investors this month identified business cycle risk as the number one risk to market stability - - up from 42% in July.

Investors have taken the view once more that gold is overvalued. In July, the net percentage taking this view dipped to a net 17%. But with gold hitting new highs, a net 43% of August's panel believes it is overvalued.

Survey of Fund Managers: An overall total 244 panelists with US$718bn of assets under management participated in the survey from 5 to 11 August. A total of 176 fund managers, managing a total of US$551bn, participated in the global survey. A total of 136 managers, managing US$359bn, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS.

Sovereigns vs. Banks: The short-selling ban in France, Spain, Italy and Belgium are met with skepticism, with Gary Baker, Bank of America Merrill Lynch. "It's really a sovereigns issue versus a banks issue in Europe," he added in an interview on Friday Aug 12:

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