Investors are waiting for the right conditions to return to equity markets amid the most pessimistic outlook yet recorded
NEW YORK: Investors are waiting for the right conditions to return to equity markets amid the most pessimistic outlook yet recorded, according to Merrill Lynch’s Survey of Fund Managers for October.
The survey released on Wednesday also found institutional fund managers have lost faith in global growth, commodities and emerging markets.
The fieldwork for the survey ended on October 9, during which time world equities lost 16% of their value, despite concerted interest-rate cuts. The proportion of investors who believe that monetary policy is too restrictive has reached a net 59%, representing a new high for the survey.
But low risk appetite and a belief that equities are undervalued could provide the foundations for a rally.
Growing risk aversion has led to a record 49% of respondents who are overweight on cash. The number of respondents who believe equities are undervalued has reached a 10-year high, at 43%.
Gary Baker, head of EMEA equity strategy at Merrill Lynch, said fund managers are waiting for the “triggers” that will give them the confidence to buy. “What they are looking for is a loosening of monetary conditions and for third-quarter earnings to clarify where problems and opportunities lie across equity markets.”
The survey also found that at the global sector level, there has been a shift away from energy, materials (now shunned as much as banks), industrials and technology in favour of consumer discretionary sectors. “Global pharmaceuticals, consumer staples and telecoms still remain the favourite ‘ports’ in this particular storm,” said Richard Bernstein, chief investment strategist at Merrill Lynch.
Bernstein also said in an investment overview that new opportunities were taking shape. “Japan appears to be one area of opportunity (the phrase “non-US” doesn’t necessarily mean “emerging markets”). The yen has been one of the strongest currencies lately, and the currency markets might be signaling that it is a safe haven from the financial storm,” said Bernstein.
After receiving $100 billion in inflows between 2002 and 2007, emerging markets have seen nearly $30 billion in redemptions in recent months. And when investors are forcibly pushed to exit directional positioning, they are usually reluctant to re-enter, hindering any quick upside for the market. Under these circumstances, Michael Hartnett, Merrill’s chief emerging market strategist, recommends focusing on the “best of breed” companies and looking ahead to 2009.
Hartnett favors a basket of large-cap emerging market stocks biased toward domestic demand where earnings growth is healthy. His screen highlights 15 stocks, which he refers to as the “Nifty 15.” The majority of the 15 stocks are from the BRIC countries Brazil, Russia, India, and China.
Wednesday’s survey, meanwhile, noted that US fund managers are now much closer to fully accepting what they expect will be a deep and prolonged US recession. Most believe it is too soon to say we have reached a bottom in equity markets.
A total of 172 fund managers managing $531 billion participated in Merrill’s global survey.
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