The recent sharp drop in oil prices has lessened fears about inflation, giving global fund managers greater confidence in the markets and they have responded by shaking off their aversion to risk and putting their high cash positions to work, according to the latest monthly survey by Merrill Lynch & Co. Inc.
“The market perception is that the oil price is a good proxy for inflation expectations,” said David Bowers, independent consultant to Merrill Lynch. “In recent months, this survey showed that investors were looking for a catalyst to put liquidity back into the market; now they have it.”
Merrill Lynch polled 210 institutional investors for the global survey between Oct. 6 and 12. Another 161 managers responded to the regional surveys. Taken together, the institutional investors have $974-billion (U.S.) in assets under administration.
The survey found that cash levels have fallen to 3.8 per cent of assets from 4.4 per cent in August. But then, the fund managers are now more upbeat about the world stock markets. Sixty per cent of respondents felt it was either fairly unlikely or very unlikely that global stock markets will drop over the next six months, up from 54 per cent in September. They are also less worried about rising inflation, excessively stimulatory monetary policy and higher short-term interest rates.
But it is not all a good news story, the monthly sampling shows. “Despite the rally in equity markets, investors remain noticeably cautious about the economic outlook,” Mr. Bowers said. They see the economic cycle as being in its later stages and believe that global economic activity will slow and, as a consequence, many worry about the direction of corporate profits. But the managers don't think a recession is in the cards. Only 9 per cent believe the global economy will experience a recession over the next 12 months.
With the concern about the economy and lower prices for oil and other commodities has come a lessened interest in emerging market equities. “For the first time in five years, asset allocators have taken a net underweight position in emerging market equities,” Mr. Bowers said.
Net figures are determined by subtracting the percentage of those who are overweight global emerging markets (GEM) from those who are underweight. Twenty-four per cent were either moderately or aggressively overweight GEM stocks, down from 31 per cent in September. Twenty-nine per cent were either moderately or aggressively underweight.
Continental Europe is now the institutional investors' favourite equity market. “It is perceived as having the most favourable outlook for corporate profits, as having a quality of earnings higher than that of the UK equity market,[and] as being the most undervalued equity market region in the world,” Mr. Bowers said.
When it comes to sectors, the investors were underweight energy stocks for the first time since February, 2002, and they were even more underweight the basic materials sector. “This new positioning is tactically positive for GEM energy and material stocks,” said Michael Hartnett, chief global emerging market equities strategist at Merrill Lynch.
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