>FUND MANAGER SURVEY GLOBAL (MERRILL LYNCH)

■ Growth up+ risk down+ defensives in = another opportunity
The July FMS shows how a modest correction in equity markets together with a larger one in commodity prices punctured investor confidence and prompted a hasty retreat back toward defensive sectors. This nervous response came despite growing conviction that we are through the worst of the economic problems and still rock-solid faith in the GEM story. It does suggest that any surprise in Q2 results could see markets being squeezed upward into H2.

■ Past-the-worst conviction rises; inflation scare eases
Investors are convinced that global growth will improve (+79% vs. 78% in June) and that this will lift corporate margins & profits (a net 51% see improvement over the next 12 months). However, a downtick in risk appetite saw a very skittish retreat back into defensive areas. That is, apart from GEM assets, which remain famously popular; and this despite China optimism coming off the boil, only to be replaced by Indonesia - now the most O/W GEM. Meanwhile, inflation fears eased as commodity & oil prices tumbled (a net 14% now see higher inflation, down from 19%) and this stabilised views on how quickly interest rate are likely to rise.

■ Asset allocators skittish as risk appetite falters
Asset allocators are in wait-and-see mode as overweights in cash (+9%) and equity (+7%) were trimmed, with bond U/W easing to -13% from -15%. Risk appetite fell, with our composite indicator standing at 36 from 38. Average cash balances saw a very sharp jump to 4.7% (vs. 4.2%), with only 12% of investors now reporting higher-than-normal risk-taking in portfolios. Hedge funds are more
active, with leverage rising to 1.2, but net long exposure fell to 23% (from 35%).

■ Equities good value, but it’s GEM vs. the Rest of the World
Equities are viewed as undervalued by a net 8% of investors, while a net 30% say bonds are expensive (up from 22% in June). But it’s not about value: a net 8% of respondents view GEM as overvalued and yet it is still seen as the only game in town, with nearly half of all investors saying it is the region they want to O/W on a 12-month view (vs. -30% for Eurozone, the lowest reading ever).

■ Retreat to defensives provides chance to re-load
Having fleetingly been U/W all big 4 defensive sectors last month, investors turned on a sixpence in July with telecom, pharma and staples all recovering strongly, at the expense of materials, energy and industrials. The degree of optimism on EM vs. Eurozone looks dangerously extreme and, more broadly, the retreat to the defensive positioning of February, in our view, provides another
opportunity to reload on cyclical over defensives trades on the expectation of confirmation of real economic growth emerging across all regions from Q3.

To see full report: FUND MANAGER SURVEY