>FUND MANAGER SURVEY GLOBAL (MERRILL LYNCH)

SAVOUR THE DIPS

■ Bond yield back-up causing no macro panic
The June FMS shows no signs that investors are spooked by the recent rise in US bond yields and oil prices. The investor mood is pro-growth and fears of a growth "double-dip" or an imminent crash in U.S. Treasuries and the US$ are currently absent. On the contrary, the consensus is overweight assets that usually benefit from rising bond yields such as commodities and Emerging Markets.

■ Optimism is back in fashion
Global growth expectations continue to surge (+78%, a 6-year high); a net 7% of investors believe global recession is likely in the next year versus 70% just two months ago. Investor expectations have shifted decisively from recession to recovery: one-third of our panel believe corporate profit growth will exceed 10% in the next 12 months; cash balances fell to 4.2% (in-line with historical average); hedge fund net exposure surged from 25% to 35%.

■ Asset allocators finally back overweight equities
Expectations shifted from deflation to inflation in June: a net 19% of investors see higher inflation in 12 mths time versus -1% last month. Asset allocators reduced bond exposure (to -15% from -3% in May) and finally moved overweight equities (+9% from -6% in May). But optimism remains measured. Back in March the FMS showed extreme pessimism making us very constructive on equities. June levels of optimism on equities or risk cannot yet be described as dangerously high.

■ All bulls in the China shop
Global positioning remains pro-China. The survey shows the biggest OW of commodities as an asset class in the past 3 years. A net 49% of fund managers want to be OW Emerging Markets, versus just 8% who wish to be long European equities. Investors are OW technology, energy & materials, as the link to Chinese growth supersedes traditional notions of early cyclicals such as consumer discretionary. And investors are U/W every single defensive sector (pharma, staples, telecoms & utilities) for the first time since Nov 2003; a point at which the S&P had seen a similar 30% rally and presaged a further 10% run into year end.

■ There will be dips...buy them
Markets and optimism may have rebounded so quickly that both need to pause for breath. But "buy the dip" is the equity message coming from the survey with Q2 reporting season set to be the next major hurdle for re-setting expectations. The contrarian trades are as follows: directional bulls would buy consumer discretionary, industrials, Europe and Japan. Directional bears would go short the relative euphoria on Emerging Markets, energy and materials. Note that panellist's feedback on oil price valuations implies the consensus thinks $65/b is fair value.

To see full report: SURVEY GLOBAL