Latest survey shows a return to defensive bias

Merrill Lynch chief investment strategist David Bowers says fund managers are “taking a slight step back” from cyclical stocks and moving towards defensive holdings.
The latest Merrill Lynch Fund Manager Survey, which quizzes around 300 institutional managers from around the world, shows there has been a shift in favour of defensives.
“This month we saw projected earnings per share growth for the year ahead drop from 11.7% to 10.3%,” says Bowers. “This is the first fall in a long while. It could be that fund managers are starting to signal that the best of profits growth is behind us.”
Because of this, the advantage of cyclical stocks versus defensives is less obvious, he adds. This can be seen in the change in attitudes to cyclical areas such as basic materials: since January, 5% fewer managers are overweight the sector, while 4% more are underweight – resulting in a drop in the net proportion overweight from 24% to 15%. In December, the net number of managers overweight was 33%.
And the shift, he argues, is consistent with another finding of the survey – managers think we are now at the mid-point in the economic cycle. Asked whether they consider the current climate to be early or late cycle, 50% of the panel said the global economy is in transition between the two.
Bowers says: “If we are at the middle part of the cycle, then investors should start to look at some of the late cyclical stocks.”
Fund managers have yet again moved back their expectation for the timing of the next rise in US interest rates. Between the December and January surveys it crept from July to September and is now expected to happen in October, although Merrill Lynch does not expect a rise this year.