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Anything but America
NEW YORK and LONDON, October 18, 2005 — American equities are the most unpopular investment class in the world today, according to Merrill Lynch's Survey of Fund Managers for October. A net 52 percent of asset allocators plan to underweight U.S. equities over the next 12 months — the most negative stance the survey has recorded in the past six years. Driving this sentiment is a poor outlook for corporate profits, a belief that equities are overvalued and the fact that the U.S. is the only major region where monetary policy is being tightened. Our panel now believe Fed Funds need to rise to 4.2 percent before U.S. monetary policy returns to "neutral" (neither stimulative nor restrictive).
If U.S. equities are currently the "damp squibs" of the financial markets, meanwhile, Japanese stocks are the rockets. Asked which assets they expect to perform best over the next year, 44 percent of asset allocators said Japanese equities.
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"Investors have historically favoured Japan and spurned the U.S. when the global economy is strengthening, not weakening as we think it is now," said David Bowers, chief global investment strategist at Merrill Lynch. "At what point will worries about the U.S. economy spill over into other parts of the world?"
Asset Allocators Pick Japan
Investors' love affair with Japan intensifies by the month. A net 45 percent of fund managers believe the country has the most favourable outlook for corporate profits, a net 14 percent believe Japanese equities are undervalued and nearly a third of the panel expect the yen to rise in value. The yen is now seen as the most undervalued of all major currencies.
The trend in favour of Japan and away from the U.S. is underlined in a special question we put to asset allocators. Asked which asset class they expect to fare the best and the worst over the next year, three themes stand out: First is the call to sell U.S. and Japanese bonds. A net 17 percent of asset allocators see U.S. bonds as the worst performers, while 20 percent of the same panel believe Japanese bonds will perform most poorly. Second is the call to sell bonds and buy equities. Nearly 60 percent of those polled believe equities are the place to be, while a net 50 percent of those questioned believe bonds are the investment to avoid. Third, sell U.S. assets to buy Japanese assets. Across asset classes, a net 23 percent expect Japanese assets to perform the best, while 19 percent believe U.S. assets will perform the worst over the next year.
This month's regional survey shows that the dislike of U.S. assets is taking on a broader Anglo Saxon aspect. A net 51 percent of the regional European specialists polled say they are underweight U.K. equities, up from 37 percent who took this view just three months ago and the most negative result since we started asking the question. Within Europe, the country benefiting most from this trend is Germany, despite the disappointing election outcome. A net 41 percent describe themselves as overweight German equities.
Volatility Expected to Rise
October's survey flags an expectation that volatility may be returning to the global equity markets along with a deterioration in risk appetite.
In a new question this month, fund managers were asked whether equity market volatility, as tracked by the Chicago Board Option Exchange's Volatility Index (VIX), will be higher or lower over the next year. A net 69 percent of the panel said they expected volatility to rise during this period. The VIX averaged 15.5 during fieldwork for this survey.
At the same time, a net 23 percent of fund managers describe their investment time horizons as shorter than normal, up from a net 13 percent who took this view in September. And a net 20 percent of managers say the risk they are taking in their investment strategy is lower than normal, up from 14 percent last month. Cash balances, meanwhile, have risen to 4.2 percent from 3.9 percent in August.
The survey's "Wall of Worry," a composite indicator that charts changes in risk appetite and cash levels, is the highest it has been in three years.
A total of 311 fund managers participated in the global and regional surveys from October 7 to October 13. These institutional investors manage a total of U.S. $1.08 trillion. The survey was conducted with the help of market research company Taylor Nelson Sofres (TNS). Through its international network in more than 50 countries, Taylor Nelson Sofres provides market information services in over 80 countries to national and multinational organizations. It is ranked as the fourth-largest market information group in the world.
Merrill Lynch Global Securities Research & Economics Group has consistently achieved high rankings for its equity and fixed income research in numerous regional and global investor surveys, such as Institutional Investor, The Wall Street Journal, LatinFinance, Asiamoney, Euromoney, Extel and Reuters.
Merrill Lynch (NYSE: MER) is one of the world's leading financial management and advisory companies, with offices in 36 countries and total client assets of approximately $1.7 trillion. As an investment bank, it is a leading global underwriter of debt and equity securities and strategic advisor to corporations, governments, institutions and individuals worldwide. Through Merrill Lynch Investment Managers, the company is one of the world's largest managers of financial assets. Firmwide, assets under management total $524 billion. For more information on Merrill Lynch, please visit www.ml.com.
Contact New York:
Susan McCabe Walley 212.449.0389
susan_mccabe@ml.com
London:
Sara-Louise Boyes 44.0.20.7995.2763
saralouise_boyes@ml.com
