Managers flee risk in search of safe havens

Fund managers are rushing out of risky assets and piling into so-called safe havens as expectations of a global economic recession mount, according to the latest global monthly survey from Merrill Lynch.

A net 44% of managers now say the global economy is already in a recession, compared with a net 24% who said so in August. The proportion of managers who expect a global recession in the next 12 months (defined as two consecutive quarters of falling output) has also risen to a majority, from 48% in August to 61% this month.

As a result of this, says Karen Olney, lead European equities strategist at Merrill Lynch, this month saw new lows in risk appetite. The survey’s risk & liquidity composite, which is driven by cash levels, investment time horizons and the level of risk taken in portfolios, has fallen to its lowest level for a decade.

Olney says that because of this global asset allocators are reporting that a “fear trade” in global bonds is taking place. Indeed, despite one blip in March 2003, asset allocators have gone overweight in bonds for the first time in 10 years.

“Emerging markets and eurozone markets are at their most hated level since 2001,” says Olney. Instead, managers are “running for cover” into American equities.

The net percentage of managers now overweight in America has more than doubled over the past month, from a net 12% to a net 26%. The amount held in global emerging markets fell from an 8% overweight in August to a 13% underweight – the lowest level since September 11, 2001.

“In times of fear the US is seen as fairly defensive and less cyclical than the eurozone,” says Olney. “The levels of popularity in US equities right now exceed those prior to September 11 [2001], but the situation may be unwound if we getter better news on the global economy.”

With the banking crisis and the prospect of an imminent recession, Olney adds that on a global, European and British basis, fund manager concerns of inflation have also plummeted.

A total of 186 global fund managers with $641 billion (351 billion) of assets took part in the survey. It was conducted jointly with Taylor Nelson Sofres, a market research company, from September 5-11.