>Fund Manager Survey Global (MERRILL LYNCH)

Less fear, no greed

Global growth expectations surge. . . and broaden
The April FMS prints the most optimistic reading on global growth since 2004. A net +24% of investors believe the global economy will strengthen over the next 12 months. China remains the principal catalyst but growth optimism has now broadened out to all regions, including previous laggards Europe and Japan.

Risk appetite rallies as bank fears ease
Our risk appetite indicator climbed to a 12-month high. Asset allocators are less pessimistic on equities, sharply cutting their underweight to 17% from 41% in March. Overweights in bonds were trimmed. Cash overweights fell to net 24%, the lowest since late-2007, lowering average cash balances to 4.9% from 5.2%. Even hedge funds raised net equity exposure to an 8-month high of 25%.

Emerging markets the preferred vehicle to play catch up
Playing catch-up with the rally in equity markets, global investors massively raised GEM exposure (to +26% from +4%) to augment a longstanding US overweight (+14%). The Eurozone (-29%) and Japan (-36%) continue to be shunned.

Bank sentiment & China optimism force cyclical rotation
The sharp rally in banking stocks in recent weeks has been met by a dramatic reduction in U/W positions on global banks to 26% from the record 48% in March. Better sentiment on banks and growth optimism has unlocked a classic sector rotation out of staples, telcos, pharma and utilities into industrials, consumer discretionary and industrials. Technology is now the most preferred global sector.


Survey sound bites

The fieldwork for April survey took place between Thursday 2nd, and Wednesday 8th April 2009.

Growth expectations
The sharp thaw in global growth expectations continues unabated with our global growth composite back above 50 for the first time since March 2005. The profound turnaround in sentiment on the Chinese economy continues, recovering from a reading of -86% in November to +26% this month (the highest since 2003). With China and the US having been the only growth stories up to this point, it wasnoteworthy to see a sharp pick up in growth expectations in the previous laggards of Japan and Eurozone.

Economic growth optimism extends into corporate profit expectations. While still negative, the degree of pessimism at -12% continued the sharp improvement from the low of -75% seen in October 2008.

Fears on inflation outlook continue to gather pace: a net 18% still expect lower inflation in 12 months time, but this is sharply up from 82% in December. This has fed a sharp change in views on short (and long) term interest rates with a net 16% now expecting higher rates 12 months out versus -17% last month.

Risk appetite
After considerable volatility in recent months, our Risk & Liquidity composite rose sharply to 35 from 28 last month. It still remains below the average of 40 seen since the start of this data series in late-2001. Better risk appetite is also reflected in the proportion of asset allocators overweight cash which fell to +24%, the lowest since late-2007.

Apocalypse averted: reluctant, not euphoric, bulls
Apocalyptic bearishness in the March FMS aided & abetted a major equity rally. The April FMS shows investors believe the worst is over and extreme defensive positions have been cut. But there is no bull market euphoria: PMs remain underweight risk, equities & cyclicals and cash levels remain high – as such the survey supports a "grind higher" view. Bulls now require support from April/May G7 economic data. The bears are reliant on China and banks disappointing.

Valuation & Asset Allocation
While a net 17% remain underweight, the survey showed a big jump in equity allocations from the all-time low of 41% recorded in March. The rally in equity markets led to a fall in those viewing equities as undervalued to 30% from 42% in March. After a sharp rise in March, bonds fell back to 9% overweight in April, slightly above February’s level but sharply down on 26% last month.

Emerging Markets are now the most popular region on a 12-month view with a net 26% of respondents overweight, up from only 4% last month. The US is the only other region allocators say they are overweight at +14%. While Eurozone
equities saw some pick up, a net 29% remain underweight, slightly better than Japan at 36%.

Commodities continued to see investment with the net overweight of 4% being the highest reading in 10 months. Gold is still seen as overvalued (7%) but oil is still seen as undervalued by a net 38% of respondents despite a 30% increase in WTI over the last 2 months.

No major change in currency views this month with GEM and sterling seen as undervalued and Euro and Yen firmly overvalued. A dissenting voice on currencies has emerged from regional equity PMs who now see $ and € as fairly valued, a marked shift from previous $ bullishness.

Growth expectations
The improvement in growth expectations seen since December continues with our economic & profit expectations composite surging to 54 from 43 in March. At +26%, fund managers’ optimism on the global economy now stands at a 5-year high. The surge in optimism on Chinese growth prospects once again led the way in boosting optimism.

Inflation and interest rates
Inflation expectations remain negative, at a net -14%, but continue the sharp reversal seen since the turn of the year. This measure continues to map well to the ISM prices paid component and is also confirmed in investor views on the direction of short term interest rates looking 12 months out.

To see full report: FUND MANAGER SURVEY