Big Global Investors Seem to be a Bit More Confident

Amid gloom and then rebounding on financial markets, the worries about banks and the optimism about the new Obama Administration in the US, the first of this year’s surveys of big global investor sentiment by Merrill Lynch, has shown some relative optimism.

The December survey saw a hint of this change when it reported that investor sentiment had stepped back from the brink of despair, but more than a third of investors wanted to see greater fiscal stimulus, according to Merrill Lynch’s Survey of Fund Managers for December.

“While 88 percent of the panel believes that the world economy is in recession, December’s survey contains evidence that the rate of deterioration is slowing.

“The net balance of investors who expect the global economy to worsen in the coming year has fallen to 36 percent, down from 60 percent in October.

“More than a quarter of respondents believe the economy will strengthen in 2009. Cash levels average 5.5 percent, up from 5.1 percent in November, the highest level since 2001. Furthermore, a widespread perception exists that stocks are cheap, both in absolute terms and relative to bonds.”

They seem to have got their wishes with the German government upping its support for the faltering economy to some 50 billion euros, the US pushing its stimulus package to some $US825 billion and more rate cuts by central banks, especially the European Central Bank at the start of January and more to start this week in New Zealand.

But there have been more bank bailouts in the US, UK, Ireland, Denmark, France and Germany, while we in Australia are in the processing of filling a gap in funding caused by the flight of foreign banks, such as Bank of America, HBOS and Royal Bank of Scotland.

“Now for January ML reports that global investor gloom has started to lift, with hopes of improving growth and inflation rather than deflation.”

“There is a lot of hope in China’s bounce back as well.

“Broad economic sentiment has improved sharply from the lows of late 2008.

“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. The proportion of fund managers who predict lower inflation has fallen to a net 64 percent from a net 82 percent in December.

“Accordingly, there is a growing conviction that interest rates will rise, with 35 percent of respondents who forecast long term rates to increase in the next 12 months, up from 10 percent in December. At the same time the average cash balance remains high at 5.3 percent, only marginally lower than December’s level of 5.5 percent.

“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.

“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.”

ML said that cash positions in Europe are at their highest level since 2001, reflecting the high level of caution within the region. A total of 42% of regional respondents are overweight cash compared with 29% in December.

“The numbers reflect how, while global economic sentiment is lightening, European expectations remain under a cloud with investors embedded in defensive positions.

“Every respondent to the regional survey expects a European recession, up from 91 percent in December. Investors are worried that corporate profits will continue to disappoint.

“This distrust means the percentage of investors who believe that European equities are cheap has almost halved, falling to 22 percent in January from 40 percent in December.

“European investors are still dancing the two-step and are reluctant to try out any more adventurous moves,” said Karen Olney, Banc of America Securities-Merrill Lynch lead European equity strategist.

“Investors continue to rotate between expensive defensive sectors and beaten, but not broken, industrial cyclicals that hope to piggyback on any indication of infrastructure-related spending by governments reigniting economies.”

ML said investors are flocking to Food & Beverage and Pharmaceuticals.

It said two survey records have been broken. Food & Beverage has hit its highest overweight in the history of the survey (net 11% of fund managers overweight).

The gulf in sentiment between Banks and Healthcare sectors is also at a record high. A net 57% of European investors are underweight Banks while a net 46% are overweight Healthcare. “Pharmaceuticals are largely immune to the credit crunch and economic slowdown that has hit banks,” said Olney.

Sterling is viewed as undervalued for the first time in seven years.

In October, a net 58% of respondents viewed sterling as overvalued but this month a net 7% believe it is undervalued. Increasing numbers view both the euro and the yen as overvalued.

US equities have become less in favour with global investors. The net percentage of asset allocators overweight the US 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, Bank of America Securities-Merrill Lynch chief emerging markets equity strategist.

The number of investors underweight in global emerging markets has fallen to 7% in January, from 17% in December.

In spite of flows into emerging markets, investors retain caution over 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.

“China remains the big global growth wildcard in 2009. Despite the announcement of huge fiscal stimulus packages in recent months, investors remain very sceptical about Chinese and Asian growth,” said Hartnett.

“Indeed, Japanese investors notably reduced their expectations for Japan’s growth to close to a record low.”

A total of 205 fund managers, managing a total of U.S. $597 billion, participated in the global survey from January 9 to January 15. A total of 167 managers, managing $US359 billion, participated in the regional surveys.

The survey was conducted by Bank of America Securities-Merrill Lynch Research with the help of market research company Taylor Nelson Sofres (TNS).

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10 Responses to “Big Global Investors Seem to be a Bit More Confident”

  1. Which one is the most likely to happen?
    1. Swine Flu Second Wave: Typically, influenza outbreaks come in waves, getting worse with each one. The very ease with which we seem to have survived the first wave of swine flu may make us vulnerable to a horrific second wave.

    2. Commercial Real Estate Collapse: Various commercial real estate deals face trillions in refinancing obligations over the coming years. But the market is practically closed, ensuring massive bankruptcies and restructuring.

    Why are lenders so freaked out? Because existing loans are going sour at a pace unlike anything we’ve seen in history. Because of that, even commercial real estate properties with strong cash flows are finding financing extremely difficult to come by.

    3. The Option Adjustable Rate Mortgage Explosion: Anyone referring to the "subprime crisis" has got to get with the program. The subprime wave of defaults is basically over. Now the question is, what about all the other types of mortgages? You know, Option ARM, Alt-As and of course, good old fashioned prime mortgage.

    The big wave of Option ARM resets has yet to come, and given the drop in home prices, refinancing won’t be realistic. Let’s hope the homeowners can afford their new monthly payments.

    4. Global Food Crisis: As we saw last year, the global food supply teeters on the edge of adequacy. Any serious shock–floods in the Midwest, a war in Asia, social unrest in China, political upheaval in Thailand or Egypt–could result in shortages in countries that import large amounts of their food.

    5. Israel Bombs Iran: The Obama administration’s openness to the Iranian regime may have the perverse effect of emboldening its nuclear ambitions. Very likely, the fears of the nuclear Iran are over-stated. It would probably behave like most members of the global nuke club, cowed by its own destructive power into behaving responsibly.

    But Iran isn’t the only country to worry about in the region. Israel may not be willing to tolerate a nuclear armed Iran, and may choose to strike out to destroy Iran’s nascent nuclear capabilities. This would obvious raise tensions throughout the Middle East. At the very least, oil prices will likely spike and remain elevated following any military action against Iran. This, in turn, will slow the global economy.

    6. A Wave of Municipal Defaults: Historically, cities and states don’t default on their loans very much. But as Warren Buffett pointed out, historical results don’t mean jack because muni insurance wasn’t around. Unless it gets a bailout, California may go bankrupt, causing the muni market to seize up, bringing public works and spending to a halt, kneecapping GDP.

    At that point, with no ability to borrow, the other states will rush to default themselves, sparing their taxpayers any more pain.

    7. Another Bank Run: It seems unlikely, given the government’s implicit guarantee of the banking sector, but it’s always possible that investors or lenders could lose confidence in one of the banks again, prompting a financing run a la Bear Stearns.

    If this happened, we’d be back to square one with all the confidence and bailouts since Lehman’s collapse — only, the government would have fewer bullets left in the gun.

    8. Runaway Inflation: The Federal Reserve seems confident that it can "land the recovery." Is it right?

    There’s good reason to be skeptical that the Fed will be able to reduce the monetary base before it floods out into the economy, driving up prices and destroying savings. For one thing, the Fed has never really been very good at doing this. By the time the Fed realizes that inflation is taking off, it may be too late.

    9. North Korean Missile Launch: Wee dictator Kim Jong II has lulled the world to sleep, performing missile tests on a seemingly daily basis. What was once a cause for alarm now barely merits a bulletin on CNBC. In fact, the dollar has rallied on the nervousness.

    But his neighbors in China, South Korea and Japan are freaked out and an actual war, or genuine provocation, could wreak havoc on far eastern trade. This might cause investors to flee towards the dollar, but it would be terrible for markets and economic activity.

    10. Chinese Financial Crisis: Most economic discussion of China these days is about how dependent the US government has become on China buying Treasury bonds. But China has lately learned that its own economy is dangerously leveraged on foreign demand for Chinese manufactured goods. The global downturn has helped expose the fragility of the Chinese economic miracle, and worse might be coming.

    A collapse of profits in China could very well spark a banking crisis, much like the collapse of real estate prices did to US financial institutions. Very little attention has been paid to the fragility of the Chinese financial system, which is dominated by large, slow, non-transparent, often corrupt state-run banks and centralized decision making. Slowing exports could be the tide that goes out and reveals whi

  2. dizneygeek Says:

    all of the above – this country is in deep doggie doodoo!

    #6 is happening in CA. The @ssholes are still talking about raising taxes, even after the special election where 2/3 of the voters told them to "go pound sand!"
    References :
    Barry is a DWEEB!

  3. Neo Neocon Says:

    Don’t worry. Teleprompter has it covered.
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  4. Live To Fish Says:

    I’ll take #10 for 100 Alex.
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  5. Freedom Wins Says:

    What she said, above me!!! She is "Right On Target"!!!!
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  6. The Libs will get sick from suckin on to much fleshlights.
    References :

  7. I , a happy Bolshevik Says:

    We love all this mess in the World!The door for Bolshevism is open!This deepening world crisis is unstoppable!
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  8. Most or all of the above at varying times and degrees.
    What a bright outlook for tomorrow.
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  9. myrrdin_810 Says:

    geez, when you put it like that, it makes me think maybe we’d all just be better off if we’d up & shoot ourselves.
    References :
    monty python’s "upperclass twit of the year contest" skit.

  10. Stellar question. The commercial market is about to take a big lick with about 3,000 parcels of lands and buildings hitting the market with the auto clsoings and even before that they haven’t taken the hit for lost revenues in rentals.

    Not sure about Iran, but we should sell them tis "green" technology we are about to invest a mint in as with those deserts the windmills will work and solar! Besides they got plenty of oil. By the way the OPEC nations overproduce all the time by millions of barrels a day. It’s about the only thing they got. So there really is not a shortage. Really CArter and Clinton should have removed the nuclear material before giving Kim the oil and money before and feel Obama is making the same stupid mistake or is it?

    Morgan Stanley hired former Enron brokers to pay their meida contacts to manipulate the price up to $140 a barrel. The regulations had been take down. The regulations stopping the greatest rip off of America also had the regulations taken down.

    Even now the banking lobbyist just finished spreading $28.7 million around Washington and ‘donating" to the House financial committee. For the money they got the Congress telling the advisory board to ‘loosen" the "mark to market’ regualtions, that in fact make the companies show actual accounting. So like Wells Fargo, Citigroup and others are now able to put out better first quarter earnings. Isn’t that why WorldCom got in trouble. Too bad the European market nixed the sprint deal with WorldCom as it probably would have set it right.

    I don’t think China has revalued the yuan, so might not be that bad, but not sure. Home rate, looks like the same thing and yo know Congress has done nothing to make sure the original regualtions are back in place or the guilty go to jail.

    The site below has the Wall street Journal article on the banking industry buying Congress and it also tells what the Congress people get from the lobbyist and who dones what. I always wonder, like GE and GM each spend about $180 million each last year in lobbyist money and wonder where it goes. That’s just the tip of the iceberg. It also doesn’t include say the $200-300,000 salary that the Congress peoples children ro spuse get working for the lobbyist firm. Sweet huh.

    Have a great 2009!
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