Investor's Business Daily, July 18th, 2007
It shouldn't come as a surprise that woes in the subprime mortgage market have dampened investors' views on the market.
For the first time, Merrill Lynch's monthly fund manager survey asked respondents to rate potential risks to financial market stability. A great majority, 72%, said credit default risk was above normal.
A net 44% said monetary risk, such as higher interest rates and volatile exchange rates, was above normal.
"Investors remain convinced that we are in for 'bear steepening,' i.e. an environment in which long and short rates are set to rise further and where the yield curve is expected to become more positively sloped," said David Bowers, an independent consultant for Merrill Lynch's money manager surveys.
Mutual fund managers remain optimistic about global growth, especially in emerging markets, according to Merrill Lynch's Global Fund Manager Survey for July.
"Investors are still convinced that we are still sitting comfortably between the late- and mid-cycle phases of the global business cycle -- a perception that has barely changed in the past two and a half years," Bowers said.
"However, in recent months, fund managers have begun to become more concerned that the global economy is now operating above its long-term sustainable growth path," he added.
Money managers ditched U.S. and euro zone stocks for the riskier emerging markets. A net 35% of managers this month vs. 16% in June are overweighted in emerging market stocks.
Preference For Cyclicals
Money managers say they are overweighted in technology, energy, industrials and materials -- cyclical sectors.
They scaled back stakes in such non-cyclical sectors as consumer staples and pharmaceuticals. That's even though they believe pharma is the cheapest sector globally.
Other sectors deemed undervalued were energy, tech, telecom and insurance.
They said utilities were the most overvalued, followed by materials, consumer goods and banks.
Money managers continue to believe stocks are better than bonds. Only 3% of those polled think stocks are overvalued. A net 33% said bonds are overvalued.
"At the corporate level, much of the gloom of three months ago has now lifted, with significant improvements in profit expectations and in the outlook for margins," Bowers said.
"In April, a net 46% of our panel thought it unlikely we would see double-digit corporate earnings growth over the next 12 months," he continued. "By July, that figure had fallen to 10%."
Average cash holdings sank from 3.7% in June to 3.4% -- the lowest ever recorded by the survey.
They still prefer large-cap stocks over small caps, and growth stocks over value.
A majority, 62%, believe that it's unlikely world markets will be lower in six months time, and 33% think world markets will go down in that period.
The survey polled 186 fund managers, who watch over $618 billion in assets. It was taken from July 6 to 12.
During that week, the Dow picked up 0.8%, world stocks 1.8%.
Yields for 10-year bonds fell eight basis points from 5.20% to 5.12%.
