Jay, good news, fund managers are bearish AND fully invested :0)
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Global Fund Managers Less Optimistic on Equities
June 17, 2003
Merrill Lynch Chief Global Investment Strategist David Bowers noted the following findings from the latest Merrill Lynch Global Fund Managers Survey:
Institutional fund managers see little value in world equity markets and no longer have any excess cash to put to work, according to the Merrill Lynch Global Fund Managers' Survey for June. Though there are modest signs that confidence is returning to the market, fund managers won't jump back into equities until there is a decisive upturn in the world economy. There is little sign of this, particularly in the economies of Europe.
Fund managers think we are stuck in a low growth environment and the stubbornly poor performance of Eurozone economies is one factor sapping confidence. Before fund managers end their love affair with bonds and switch into equities they need to see much more compelling evidence for an upswing in the world economy.
Half the fund managers participating in the survey see world stock markets as fairly valued, reversing 12 straight months in which a majority of fund managers described equities as cheap. In addition, 66% of fund managers now believe the equity market to be overbought in the short term.
Meanwhile, institutional fund managers no longer have any excess cash. The average cash balance slumped to under 4% in June and 60% of respondents are now underweight cash or have a neutral position, the most fully invested fund managers have been in the past two years. But, even though a third of fund managers believe bonds to be overvalued, bond prices have not fallen and are unlikely to do so until GDP growth expectations rise decisively.
There are some encouraging signs that confidence is creeping back: the mean expectation for nominal GDP growth for the G7 area rose from 3.1% to 3.3%; there is renewed hope that top-line sales growth is strengthening; and a majority of respondents say their appetite for risk has returned to normal.
But these positive signals are outweighed by strong indications that a major shift in growth expectations has yet to take place. More than half the panel expects G7 GDP growth will be less than 3% and, though growth and profit expectations have risen, industrial and consumer price expectations are well below the levels seen last year.
Also, despite the collapse of credit spreads seen during the last nine months, 56% of respondents still want companies to use their cash flow to reduce debt, rather than invest for growth. And investment time horizons remain stubbornly low for a third of the panel, suggesting there is a strong trading element to fund managers' investment strategies.
Regionally, the divergence between the Eurozone and the U.S. has become starker. Eurozone countries are seen as having much less favorable conditions for corporate profits than the U.S. and the quality of Eurozone company earnings is deemed to be poorer. A third of respondents intend to underweight Eurozone assets over the next year.
Although the euro is increasingly seen as the most overvalued major currency, all five of the world's top currencies are out of favor with investors. Because currencies are a zero sum game, this finding is puzzling until emerging currencies are taken into account. By including these in the survey for the first time, we found that 42% of those who expressed a view see emerging currencies as undervalued.
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