Investors Hopeful but Holding on to Cash

The Merrill Lynch Fund Manager Survey for January found that global investor gloom is starting to lift, with hopes of improving growth and inflation rather than deflation.

Broad economic sentiment has improved sharply from the lows of late 2008, according to a press release from Merrill Lynch. 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 (see “Fund Managers Pessimistic about Economy).

Merrill Lynch said the proportion of fund managers who predict lower inflation has fallen to a net 64% from a net 82% in December. There is a growing conviction that interest rates will rise, with 35% of respondents who forecast long-term rates to increase in the next 12 months, up from 10% in December. At the same time, the average cash balance remains high at 5.3%, only marginally lower than December’s level of 5.5%.

“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, in the release. “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.”

Out of U.S. into Emerging Markets

U.S. equities have become less in favor with global investors, according to the survey results. The net percentage of asset allocators overweight the U.S. 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, Banc of America Securities-Merrill Lynch Chief Emerging Markets Equity Strategist. The number of investors who are underweight in global emerging markets has fallen to 7% in January, from 17% in December.

The release also said European cash levels are at the highest level since 2001, reflecting the defensive position of investors. Every respondent to the regional survey expects a European recession.

Merrill Lynch also found that in spite of flows into emerging markets, investors retain caution about China. The percentage of regional investors who expect the Chinese economy to improve has risen from 6%, but is still low at 10%. The proportion of respondents who expect Chinese growth to slow in the next 12 months has fallen to 70%, from 79% in December.

A total of 205 fund managers, managing a total of $597 billion, participated in the global survey from January 9 to 15. A total of 167 managers, managing $359 billion, participated in the regional surveys. The survey was conducted by Banc of America Securities – Merrill Lynch Research with the help of market research company Taylor Nelson Sofres (TNS).