The highest proportion of global fund managers in over a decade – a net 43% – see equities as undervalued, according to the latest monthly survey from Merrill Lynch.
This suggests all they need is a catalyst to put their cash to work. An easing of monetary conditions or more comfortable earnings estimates are the most likely such developments, says Gary Baker, the head of the EMEA equity strategy group at Merrill Lynch.
At present, managers are conservatively positioned. Cash levels, at 5.3%, stand at their highest since 2003. The proportion who admit to being overweight cash, at 49%, is at a record level. “Asset allocation is incredibly defensive,” says Baker.
In terms of sector allocation the favourites are pharmaceuticals, staples, telecoms and utilities. The least favoured sectors are materials, banks and industrials.
Deep gloom among fund managers provides the backdrop to the survey. Baker describes it as: “The most pessimistic we’ve ever conducted. No debate. It was incredibly gloomy”.
A net 69% say they are expecting a global recession – defined as two consecutive quarters of negative GDP growth – in the next 12 months. However, Karen Olney, Merrill’s head of European equity strategy, says she doubts they have taken the definition literally.
In addition to a loss of faith in growth, the prospects for China are seen to be dimming. A net 79% of regional Asia specialists see the Chinese economy as likely to become weaker in the next 12 months.
On a more positive note, managers have become less worried about inflation. They see low growth as the main threat on its own, rather than combined with inflation. “The fear of stagflation has gone,” says Baker.
Olney (pictured) says European managers are even more gloomy than global ones.
“If it’s bleak and dire for the global outlook, it’s even worse for the eurozone,” she says.
Apparently none of the region’s fund managers believe the earnings forecasts for its companies.
A total of 172 global fund managers with $531 billion (£307 billion) of assets took part in the survey.
It was conducted jointly with Taylor Nelson Sofres, market research company, from October 3-9.