Cash levels have reached a new high and risk appetite is close to record lows, yet fund managers continue to see value in equities, according to Merrill Lynch’s Survey of Fund Managers for March.
Asset allocators’ cash positions worldwide rose to a record high in March with a net 42 per cent who report that they were overweight cash, up from February’s record of 41 per cent.
The FMS composite indicator for risk and liquidity stayed at 31 – unchanged month-on-month and well down from the long-term average of 42. Respondents reiterated their deep-seated belief that equities are attractive. A net 25 per cent of the panel takes the view that equities are undervalued on absolute terms and relative to bonds.
This combination does not guarantee a rally. But it has, in the past, been a pre-requisite for a comeback, that can catch unaware those positioned for falling markets (a bear squeeze).
“While many raw ingredients for a bear squeeze have come together, what’s missing is the catalyst,” said David Bowers, independent consultant to Merrill Lynch. “With growing fears of both recession and inflation, it is harder to identify what that catalyst is going to be – and when it will appear.”
Not only is the risk of recession rising, but an increasing majority of investors are also braced for stagflation. More than three quarters (77 per cent) of the panel believe that the global economy is entering a year when growth is below trend, while inflation is above trend. Two thirds of investors took that view in February.
Many more fund managers believe recession either has begun, or will do so soon. The net percentage of fund managers who believe the global economy is already in recession has almost tripled this year, rising to 22 per cent in March from eight per cent in January.
More than one third of respondents expect a global recession in the coming 12 months, compared with 19 per cent who took that view in January. Fund managers specialising in Asia and emerging markets have highlighted China as a growing concern.
The net percentage of respondents who expect the Chinese economy to weaken has more than doubled this year, to 64 per cent in March from 29 per cent in January.
In spite of their gloom over the macro economy, investors have not adjusted expectations for cash payouts from stocks they own. Returning cash to shareholders is still the most important use of cash flow, according to 42 per cent of respondents. Only 30 per cent prioritise improving balance sheets.
Eurozone investors are turning to commodity-based stocks as stagflation fears take hold, according to the regional FMS. An overwhelming net 87 per cent of respondents expect eurozone growth to slow – up from a net 79 per cent in February. More than half of respondents see inflation in the eurozone rising.
Eurozone investors’ overweight position in oil and gas stocks highlights their keen desire to gain exposure to the continuing boom in commodities.
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