Investor's Business Daily, September 19th, 2007
Prior to the Federal Reserve's rate cut Tuesday, money managers had become more risk averse and their investment horizon had shortened to levels not seen since March 2003, Merrill Lynch's September Global Fund Manager Survey found.
"At last, the turmoil in credit markets is starting to damage the prospects for the real economy," said David Bowers, an independent consultant to Merrill Lynch. "What earnings growth there will be is now more likely to come from cost cutting than from higher volumes or prices."
The percentage of money managers who expect the global economy to weaken over the next 12 months rose to 48% from 26% last month. The stock market's surge Tuesday and Wednesday may help alleviate those concerns -- if the rally holds.
A total of 68% (vs. 51% last month) said they believe corporate profits will slightly or strongly deteriorate over the next 12 months. A majority, 71%, said it's fairly or very unlikely that earnings will increase 10% or more over the next year.
A net 34% of those polled said liquidity conditions were negative. Just two months ago, a net 75% said they were positive. A net 61% (vs. 32% in August) said business-cycle risk is above normal, posing a significant threat to market stability.
Only 14% of money managers said they see a global recession happening in the next 12 months. Money managers still believe equities are undervalued compared with bonds.
"Despite the concern about global growth prospects, fund managers still see the current turmoil as creating value in equities," Bowers said. "The indicator of equity overvaluation fell back from 45 in August to 39 -- the lowest level since 2003."
A net 23%, up from 11% in August, said equities were undervalued. A net 37%, up from 29% in August, said they would increase their positions in stocks. Meanwhile, two-thirds remain underweight bonds. A net 42% said they believed global bond markets were overvalued.
Fund managers' cash levels, at an average of 4.3%, were about the same as they were in August, but slightly higher than July's 3.4% and June's 3.7%.
A net 31% said they were overweight cash relative to their benchmarks. Two months ago, a net 13% said they were overweight in cash.
Foreign Outlook
Money managers continued to favor emerging markets and euro zone stocks at the expense of U.S. and U.K. stocks. A net 36% said they were overweight emerging markets. A net 37% said they were overweight the euro zone.
They've become more pessimistic about Japan's outlook for economic recovery as the yen has strengthened against the dollar. A net 14% were underweight Japanese stocks vs. a net 8% being overweight in August.
Managers were optimistic about world stock markets overall; 61% said it's fairly or very unlikely that world markets will be lower in six months. They were most bullish on the industrials, energy and tech sectors. They were underweighted in utilities, banks and consumer discretionary.
The survey polled 188 money managers, representing $615 billion in assets under management. It was conducted Sept. 7-13. During that period, world equities fell 0.4% and the Dow lost 1.2%. Crude oil jumped 8%. The yield on 10-year Treasuries continued lower.
