Merrill Lynch survey reveals record global pessimism

Global fund managers are expressing record levels of pessimism, according to the latest monthly survey from Merrill Lynch.

Several indicators show how gloomy managers are. A net 41% are overweight in cash – the highest level since the aftermath of the terror attacks on September 11. Cash levels have jumped to 4.7% from 3.9% in the past month and investment time horizons have shortened to their lowest since March 2003.

“The numbers in this month’s survey are amazing,” says David Bowers, a consultant to Merrill Lynch on the survey. “Risk aversion and liquidity levels are extraordinarily high.”

The pessimism corresponds with a view that the economy is moving towards a recession. Some 28% see a recession – defined as two consecutive quarters of falling GDP – in the next 12 months. This compares with only 19% in January and 12% in November.

Some 67% of managers say the global economy will experience below-trend growth and above-trend inflation in the next 12 months. Yet concerns about growth seem to trump those related to rising prices, with only a net 2% seeing global core inflation likely to be higher in 12 months’ time.

Managers strongly favour a looser monetary policy to help head off recession. A net 18% say that monetary policy is too restrictive, despite the sharp cut in American interest rates over the past month.

Fund managers still see global equities as undervalued and bonds as overvalued, despite the overall gloom. A net 25% of the panel see equities as cheap, compared with 5% only three months ago. Most managers see bonds as overvalued.

Perceptions of the relative attractions of different regions are changing too. Global emerging markets are now seen as the most overvalued region, while Japan is by far the most undervalued.

On a sector level, the most popular ones in terms of positioning are defensive areas such as telecoms and pharmaceuticals. The least popular sectors are more cyclical ones such as discretionary, banks and insurance.

A total of 190 global fund managers with $587 billion (£299 billion) of assets participated in the survey. It was conducted with Taylor Nelson Sofres, a market research firm, from February 1-7. Between this survey and the previous one, the Federal Reserve cut interest rates by one and a quarter points.