Amid gloom and then rebounding on financial markets, the worries about banks and the optimism about the new Obama Administration in the US, the first of this year’s surveys of big global investor sentiment by Merrill Lynch, has shown some relative optimism.
The December survey saw a hint of this change when it reported that investor sentiment had stepped back from the brink of despair, but more than a third of investors wanted to see greater fiscal stimulus, according to Merrill Lynch’s Survey of Fund Managers for December.
"While 88 percent of the panel believes that the world economy is in recession, December’s survey contains evidence that the rate of deterioration is slowing.
"The net balance of investors who expect the global economy to worsen in the coming year has fallen to 36 percent, down from 60 percent in October.
"More than a quarter of respondents believe the economy will strengthen in 2009. Cash levels average 5.5 percent, up from 5.1 percent in November, the highest level since 2001. Furthermore, a widespread perception exists that stocks are cheap, both in absolute terms and relative to bonds."
They seem to have got their wishes with the German government upping its support for the faltering economy to some 50 billion euros, the US pushing its stimulus package to some $US825 billion and more rate cuts by central banks, especially the European Central Bank at the start of January and more to start this week in New Zealand.
But there have been more bank bailouts in the US, UK, Ireland, Denmark, France and Germany, while we in Australia are in the processing of filling a gap in funding caused by the flight of foreign banks, such as Bank of America, HBOS and Royal Bank of Scotland.
"Now for January ML reports that global investor gloom has started to lift, with hopes of improving growth and inflation rather than deflation."
"There is a lot of hope in China’s bounce back as well.
"Broad economic sentiment has improved sharply from the lows of late 2008.
"The Merrill Lynch Fund Manager Composite Indicator for Growth Expectations has climbed to 30 this month from 25 in December and a low of 17 in October. The proportion of fund managers who predict lower inflation has fallen to a net 64 percent from a net 82 percent in December.
"Accordingly, there is a growing conviction that interest rates will rise, with 35 percent of respondents who forecast long term rates to increase in the next 12 months, up from 10 percent in December. At the same time the average cash balance remains high at 5.3 percent, only marginally lower than December’s level of 5.5 percent.
"Investors are talking a more positive story, especially with regards to the U.S., but the fear factor remains," said Gary Baker, Banc of America Securities-Merrill Lynch head of EMEA equity strategy.
"They have firepower to act, but are unconvinced by the modest recent equity rally, suggesting it is a bear market rally in both sentiment and markets. Global sector allocations remain resolutely defensive."
ML said that cash positions in Europe are at their highest level since 2001, reflecting the high level of caution within the region. A total of 42% of regional respondents are overweight cash compared with 29% in December.
"The numbers reflect how, while global economic sentiment is lightening, European expectations remain under a cloud with investors embedded in defensive positions.
"Every respondent to the regional survey expects a European recession, up from 91 percent in December. Investors are worried that corporate profits will continue to disappoint.
"This distrust means the percentage of investors who believe that European equities are cheap has almost halved, falling to 22 percent in January from 40 percent in December.
"European investors are still dancing the two-step and are reluctant to try out any more adventurous moves," said Karen Olney, Banc of America Securities-Merrill Lynch lead European equity strategist.
"Investors continue to rotate between expensive defensive sectors and beaten, but not broken, industrial cyclicals that hope to piggyback on any indication of infrastructure-related spending by governments reigniting economies."
ML said investors are flocking to Food & Beverage and Pharmaceuticals.
It said two survey records have been broken. Food & Beverage has hit its highest overweight in the history of the survey (net 11% of fund managers overweight).
The gulf in sentiment between Banks and Healthcare sectors is also at a record high. A net 57% of European investors are underweight Banks while a net 46% are overweight Healthcare. "Pharmaceuticals are largely immune to the credit crunch and economic slowdown that has hit banks," said Olney.
Sterling is viewed as undervalued for the first time in seven years.
In October, a net 58% of respondents viewed sterling as overvalued but this month a net 7% believe it is undervalued. Increasing numbers view both the euro and the yen as overvalued.
US equities have become less in favour with global investors. The net percentage of asset allocators overweight the US equity market fell from 25% in December to 7% in January.
"There has been a notable dip in the U.S. equity market’s popularity and emerging market equities have been the new-year beneficiary of rotation away from the U.S.," said Michael Hartnett, Bank of America Securities-Merrill Lynch chief emerging markets equity strategist.
The number of investors underweight in global emerging markets h
