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| David Bowers |
Nearly one in five respondents (19 percent) now believe that a global recession is either "likely" or "very likely" over the next 12 months according to the Merrill Lynch's Survey of Fund Managers for January 2008.
The percentage of panellists who think that a global recession has already started doubled to 8 percent from 4 percent in December. Investors increasingly believe that business cycle risk poses the biggest threat to global financial market stability — now on a par with credit risk and significantly more than counterparty risk. Concern about Europe's economic health is growing, with a record 80 percent of respondents to the regional survey expecting the economy to weaken in 2008.
"The period of denial, by some investors, that the credit crunch could have serious repercussions for the real economy may be over," saidDavid Bowers, independent consultant to Merrill Lynch. "This month's survey shows an evolution of expectations, from fears of a slowdown to fears of a major recession."
Out of Equities, Into Cash, as Profit Outlook Worsens
As investors have become more pessimistic about the outlook for corporate performance, they have been making significant changes to their asset allocations. The vast majority expect profit margins to shrink in 2008. A net 77 percent expects profits to grow less than 10 percent in the next 12 months, compared with a net 66 percent who took that view in December and a net 39 percent who took that view in October.
The number of asset allocators overweight equities has tumbled, despite a net 15 percent of investors who still view the asset class as undervalued. Only a net 6 percent remain overweight equities, compared with a net 20 percent in December. Some have shifted towards fixed-income, cutting underweight positions. A net 28 percent were underweight bonds in January, compared with a net 40 percent who were underweight bonds in December. More notable, however, is an aggressive shift into cash over the past two months. A net 32 percent of respondents were overweight cash in January, compared with 26 percent in December and 20 percent in November.
| ML FMS Composite Indicators |
Jan |
Dec |
Nov |
Oct |
| Growth Expectations Composite |
23 |
20 |
25 |
25 |
| Monetary Stance Composite |
49 |
49 |
60 |
60 |
| Perceptions of Equity Overvaluation |
43 |
44 |
48 |
48 |
| Risk Appetite & Liquidity Composite |
34 |
36 |
38 |
39 |
European Sentiment Collapses to Lowest in a Decade
Expecting Europe's economy to weaken in 2008, investors are extremely pessimistic about the region's corporate earnings. A net 80 percent of European fund managers expect earnings per share growth in the region to deteriorate, up sharply from a net 53 percent in December. They have slashed their holdings in Industrials to underweight and to levels consistent with the May 2006 period of panic. As a substitute, investors have rushed back into Health Care and Oil & Gas. They continue to underweight Banks, still seen as a value trap.
"While arguments to be bullish on European equities persist, it is clear that investors are bracing themselves for a raft of earnings downgrades. The downside is limited however, as European markets have priced in earnings falling 57 percent of the way to the trough," said Karen Olney, chief European equities strategist at Merrill Lynch.
Bank Bonds Preferred to Equity
Banks have become the pariahs of the equity markets globally. The net percentage of investors underweight Global Banks increased in January to 36 percent from 27 percent merely one month earlier. Merrill Lynch believes that investors will find it easier to make money from buying into bank debt than buying into bank stock this year.
"Banks in 2008 find themselves in a similar situation to Telecoms companies in 2002," said Barnaby Martin, European credit strategist at Merrill Lynch. "Their efforts to deleverage will be bad for shareholders, but good news for bondholders."
Banks will have to scale back their lending to corporates as a key part of efforts to shore up balance sheets. Companies in cyclical sectors will find their bank lines reduced at a time when it is also difficult to raise capital through bond issues.
A total of 195 fund managers participated in the global survey from January 4 to January 10, managing a total of U.S. $671 billion. A total of 168 managers participated in the regional surveys, managing U.S. $448 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.
