Investors head for cover as falling equities test nerves

Date: Thursday, July 16, 2009
Author: Hedgeweek.com

Investors have responded to a fall in world equity markets by scaling back their risk taking and returning to recession-proof stocks, according to a survey of fund managers by Merrill Lynch.
 
Average cash balances rose to 4.7 per cent from 4.2 per cent in June.

Having been fleetingly underweight all the big defensive sectors, investors have started reversing their stance.

A net 11 per cent of respondents are now overweight pharmaceuticals, a traditional safe-haven, compared to a net two per cent underweight the sector in June. Exposure to staples and telecoms also rose.

The percentage of investors overweight materials, a highly cyclical sector, fell to a net one per cent from a net 15 per cent in June.

World equity markets fell by 4.9 per cent from 2 to 9 July when the survey was completed.
 
Confidence in the global economy remains strong, however. A net 79 per cent of the panel believes global growth will improve in the next 12 months, up from 78 per cent in June.

'July's survey shows confidence in global markets remains very fragile. Investors believe the worst is over for the economy but are very narrowly positioned for recovery in emerging markets and technology stocks,' says Michael Hartnett, Banc of America Securities-Merrill Lynch chief global equities strategist.
 
Amid reduced risk taking, investors are increasing, rather than scaling back, their allocations to emerging markets, at the expense of investment in Europe and the US

'Decoupling is having a sequel. Investors are very overweight emerging market equities while at the same time underweight every other equity region,' says Hartnett.
 
A net 48 per cent of respondents say that emerging markets is the region they most want to be overweight, an increase of 11 percentage points from June's survey. The second favourite destination is Japan but the gap is great; only a net two per cent of the panel wants to be overweight Japanese equities.
 
Investors have become more negative about equities in both the eurozone and the US. A net 30 per cent of the panel would most like to underweight the eurozone - the worst reading on the region since 2001. A net nine per cent would most like to underweight US equities, compared with a net three per cent wanting to overweight the US in June.
 
Investors are overriding the perceived lack of value on offer in emerging markets to remain bullish towards the region. A net eight per cent of global respondents view emerging markets as overvalued. Equities broadly are seen as undervalued by eight per cent of the panel.
 
European respondents are starting to believe that an end to recession is in sight, but their equity allocations show they are becoming more, rather than less, defensive.
 
The regional survey shows a net 52 per cent expecting recession to continue in the next 12 months, down from 70 per cent in June. Furthermore a net 20 per cent says that equities are undervalued. However, in the past month they have scaled back positions in 15 out of 19 sectors.

European portfolio managers have only increased exposure to healthcare/pharmaceuticals, food and beverages, telecoms and utilities - all counter-cyclical sectors. A net 33 per cent reduced exposure to industrial goods and services over the month.

European investors are now only overweight healthcare/pharmaceuticals, oil and gas, technology and telecoms.
 
'European investors' defensiveness has left them overweight just 4 out of 19 sectors. If the macroeconomic outlook is correct, then these extreme underweight positions are looking unsustainable,' says Patrik Schöwitz, Banc of America Securities-Merrill Lynch European equity strategist.