Risk appetite at new lows; markets down 7% but valuation not seen improving
By GENEVIEVE CUA 18 September 2008
GLOBAL fund managers are bracing themselves for a recession, and risk appetite has hit new lows, Merrill Lynch has found in its latest monthly survey.
Surprisingly, despite the 7 per cent fall in markets, at the time of the survey in mid-August, investors did not think valuations had improved.
‘This implies that equity fundamentals have deteriorated. Although investors think that equities offer better value than bonds, that has not stopped asset allocators going overweight bonds for the first time in a decade,’ said Merrill Lynch.
Merrill’s composite index of risk appetite hit a record low in September as investors took on more defensive strategies and shortened their investment horizons. Cash levels remained high. Merrill said it was disturbing that a net 39 per cent of respondents thought liquidity conditions - referring to depth of markets and ease of trade - had deteriorated. Investors are using an ex-ante (forecast) equity risk premium of 3.9 per cent.
On the economy, the survey found that fear was increasingly evident; with many managers believing the global economy is already in recession or is likely to go into recession in the next 12 months.
Fund managers remained gloomy on corporate earnings and operating margins, believing that consensus earnings expectations were still unrealistically high.
Merrill pointed out that the biggest surprise is a collapse in inflation expectations. The net percentage of respondents that expected higher core inflation has fallen back to levels last seen in 2001. Merrill said this could be an over-reaction to the fall in commodity prices, or it may also reflect fears of a global slowdown.
The proportion of managers that believed in a stagflationary environment has dropped sharply from 87 per cent in June to 66 per cent in September.
Attention, however, is turning to monetary policy which a net 29 per cent of respondents believed to be ‘too restrictive’. A net 51 per cent expect short rates to be lower in 12 months.
On risk appetite, asset allocators have overweight bonds for the first time in the survey’s history. A record balance of asset allocators favour US stocks, with corporate America having the most favourable outlook for earnings relative to other regions.
On emerging market equities, they have the most negative net underweight stance since 2001.
EPFR Global, which tracks fund flows, says outflows out of emerging market equity funds have hit US$28 billion as at the first week of September, compared with net inflows of US$10.7 billion at this time last year.
In September, US equity funds attracted in US$4.28 billion in the first week despite a drop of 3.5 per cent in the value of portfolios.
Merrill said a major factor behind the more positive stance on US equities is the sharp rebound in the US dollar. A net 43 per cent of asset allocators believe the dollar is undervalued, and continue to shun the euro.
On emerging market currencies, the view has also changed. Merrill said three months ago, a net 41 per cent thought they were undervalued; in the latest survey only 15 per cent held that view.
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Fund managers bracing for recession: survey
Risk appetite at new lows; markets down 7% but valuation not seen improving
By GENEVIEVE CUA
18 September 2008
GLOBAL fund managers are bracing themselves for a recession, and risk appetite has hit new lows, Merrill Lynch has found in its latest monthly survey.
Surprisingly, despite the 7 per cent fall in markets, at the time of the survey in mid-August, investors did not think valuations had improved.
‘This implies that equity fundamentals have deteriorated. Although investors think that equities offer better value than bonds, that has not stopped asset allocators going overweight bonds for the first time in a decade,’ said Merrill Lynch.
Merrill’s composite index of risk appetite hit a record low in September as investors took on more defensive strategies and shortened their investment horizons. Cash levels remained high. Merrill said it was disturbing that a net 39 per cent of respondents thought liquidity conditions - referring to depth of markets and ease of trade - had deteriorated. Investors are using an ex-ante (forecast) equity risk premium of 3.9 per cent.
On the economy, the survey found that fear was increasingly evident; with many managers believing the global economy is already in recession or is likely to go into recession in the next 12 months.
Fund managers remained gloomy on corporate earnings and operating margins, believing that consensus earnings expectations were still unrealistically high.
Merrill pointed out that the biggest surprise is a collapse in inflation expectations. The net percentage of respondents that expected higher core inflation has fallen back to levels last seen in 2001. Merrill said this could be an over-reaction to the fall in commodity prices, or it may also reflect fears of a global slowdown.
The proportion of managers that believed in a stagflationary environment has dropped sharply from 87 per cent in June to 66 per cent in September.
Attention, however, is turning to monetary policy which a net 29 per cent of respondents believed to be ‘too restrictive’. A net 51 per cent expect short rates to be lower in 12 months.
On risk appetite, asset allocators have overweight bonds for the first time in the survey’s history. A record balance of asset allocators favour US stocks, with corporate America having the most favourable outlook for earnings relative to other regions.
On emerging market equities, they have the most negative net underweight stance since 2001.
EPFR Global, which tracks fund flows, says outflows out of emerging market equity funds have hit US$28 billion as at the first week of September, compared with net inflows of US$10.7 billion at this time last year.
In September, US equity funds attracted in US$4.28 billion in the first week despite a drop of 3.5 per cent in the value of portfolios.
Merrill said a major factor behind the more positive stance on US equities is the sharp rebound in the US dollar. A net 43 per cent of asset allocators believe the dollar is undervalued, and continue to shun the euro.
On emerging market currencies, the view has also changed. Merrill said three months ago, a net 41 per cent thought they were undervalued; in the latest survey only 15 per cent held that view.
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