>FUND MANAGER SURVEY GLOBAL (MERRILL LYNCH)

No “Sell in May”

■ The bulls are back
Investors are now positioned for global economic recovery according to the May FMS. The unrelenting gloom of a mere three months ago has been replaced by fairly typical early-cyclical sentiment, with the only hint of potential irrational-exuberance in Emerging Markets. Real economic data now needs to satisfy consensus expectations but the May FMS does not say “Sell in May”.

■ Surging optimism on macro outlook and corporate profits
Optimism on global economic growth surged with a net 57% of panellists expecting a stronger economy- the highest reading since early-2004. And for the first time since March 2005, investors expect corporate profits to improve in the next 12 months, with over a quarter of respondents forecasting EPS growth to exceed 10%.

■ All regions seeing optimism (even Europe. . .)
Global growth optimism remains founded on China with two-thirds of investors expecting strength. However, even the final recessionary holdout has turned pro-growth with a net 35% of fund managers expecting Europe’s economy to improve, compared to a negative 26% last month.

■ Rising risk appetite but asset allocators hedge bets
The BAS-ML Risk & Liquidity composite jumped to the highest level since Nov 2007, with investors cutting cash balances to 4.3% (from 4.9% last month and a recent peak of 5.5%). However, asset allocators are still hedging their bets: they remain U/W equities (-6%) and have only marginally lowered cash O/W (+21% from +24%). A brief 9-month sojourn into bonds ended with allocators cutting to a net 3% U/W. They stay U/W Europe & Japan, but a record net 40% of investors see GEM as the region to O/W for the next 12 mths.

■ Defensives hacked back
Investors’ top 3 global sectors are now technology, energy and materials as May saw a rout in defensive sectors: pharma fell to -2% from +21%, staples -1% from +9%, and utilities -19% from -15% (now the most U/W global sector). The stubborn bank U/W was further reduced to its lowest level since June 2007.

■ What happens next?
Markets in H1 were all about extreme positioning & policy. With positioning now more balanced, markets in H2 will be driven by the economy & earnings. The FMS says the market grinds higher via asset allocation moves and pressure from the ongoing U/W in global banks. The grind lower risks revolve around weaker Chinese/EM data. Contrarian trades to mull over are long Europe/Japan, short EM/China; long pharma/utilities, short technology/materials.

To see full report: FUND MANAGER SURVEY