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Merrill Lynch Fund Manager Survey Finds Cash Hitting New High as Stagflation Fears Take Hold
ARE THE INGREDIENTS FOR A "BEAR SQUEEZE" COMING TOGETHER?
NEW YORK and LONDON, March 19, 2008 — Cash levels have reached a new high, risk appetite is close to record lows yet fund managers continue to see value in equities, according to Merrill Lynch's Survey of Fund Managers for March.
Asset allocators' cash positions rose to a record high in March with a net 42 percent who report that they were overweight cash, up from February's record of 41 percent. The FMS composite indicator for risk and liquidity stayed at 31 — unchanged month-on-month and well down from the long-term average of 42. Respondents reiterated their deep-seated belief that equities are attractive. A net 25 percent of the panel takes the view that equities are undervalued on absolute terms and relative to bonds. This combination does not guarantee a rally. But it has, in the past, been a prerequisite for a comeback that can catch unaware those positioned for falling markets (a bear squeeze).
"While many raw ingredients for a bear squeeze have come together, what's missing is the catalyst," said David Bowers, independent consultant to Merrill Lynch. "With growing fears of both recession and inflation, it is harder to identify what that catalyst is going to be — and when it will appear."
Stagflation Fears Spur Real Economy Gloom
Not only is the risk of recession rising, but an increasing majority of investors are also braced for stagflation. More than three-quarters (77 percent) of the panel believe that the global economy is entering a year when growth is below trend while inflation is above trend. Two-thirds of investors took that view in February.
Many more fund managers believe that recession either has begun, or will do so soon. The net percentage of fund managers who believe the global economy is already in recession has almost tripled this year, rising to 22 percent in March from 8 percent in January. More than one-third of respondents expect a global recession in the coming 12 months, compared with 19 percent who took that view in January. Fund managers specializing in Asia and emerging markets have highlighted China as a growing concern. The net percentage of respondents who expect the Chinese economy to weaken has more than doubled this year, to 64 percent in March from 29 percent in January.
In spite of their gloom over the macro economy, investors have not adjusted expectations for cash payouts from stocks they own. Returning cash to shareholders is still the most important use of cash flow, according to 42 percent of respondents. Only 30 percent prioritise improving balance sheets.
Eurozone Investors Seek to Profit From Stagflation
Eurozone investors are turning to commodity-based stocks as stagflation fears take hold, according to the 
Regional FMSRegional FMS. An overwhelming net 87 percent of respondents expect eurozone growth to slow — up from a net 79 percent in February. Over half of respondents see inflation in the eurozone rising. However, a similar majority also fears that the European Central Bank's monetary policy is too restrictive and risks impeding growth at a time when the U.S. Fed is encouraging growth through rate cuts.
"Eurozone fund managers are playing safe by punishing sectors that indulged in the credit binge and seeking refuge elsewhere," said Karen Olney, chief European equities strategist at Merrill Lynch. "Fund managers are shifting to the few sectors that could profit from stagflation." Investors are overweight Oil & Gas, Utilities and Basic Resources. The number overweight Oil & Gas has increased fourfold month on month. The biggest underweight positions are in Retail, Automobiles and Banks.
Commodities Face Threat From Inflation
Eurozone investors' overweight position in Oil & Gas stocks highlights their desire to gain exposure to the continuing boom in commodities. The Global SurveyGlobal Survey shows 25 percent of respondents are overweight energy stocks, up from 19 percent in February.
The big question for investors is how long they can depend on commodities and commodity-linked stocks to deliver attractive returns. "While commodities enjoy a good short-term outlook, inflation poses a medium-term risk to the asset class," said Francisco Blanch, head of Global Commodities Research at Merrill Lynch.
"Inflationary pressures are already evident in emerging market economies that import commodities with currency pegs contributing to the effect. Furthermore, U.S.-led efforts to revive the financial system are adding to the inflationary mix in emerging markets." A total of 193 fund managers participated in the global survey from March 7 to March 13, managing a total of U.S. $676 billion. A total of 161 managers participated in the regional surveys, managing U.S. $405 billion. 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. Survey results were analysed by David Bowers, who is joint managing director of Absolute Strategy Research Ltd, a financial services consultancy.
Merrill Lynch Global Research 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 is one of the world's leading wealth management, capital markets and advisory companies, with offices in 40 countries and territories and total client assets of almost $2 trillion. As an investment bank, it is a leading global trader and underwriter of securities and derivatives across a broad range of asset classes and serves as a strategic advisor to corporations, governments, institutions and individuals worldwide. Merrill Lynch owns approximately half of BlackRock, one of the world's largest publicly traded investment management companies, with more than $1 trillion in assets under management. For more information on Merrill Lynch, please visit www.ml.com.
Contact Research Communications: New York:
Susan McCabe Walley 212.449.0389
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