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Merrill Lynch’s November survey of fund managers shows investors remain unconvinced on recent financial market policy measures

Investors remain unconvinced that a spate of policy measures from governments and central banks can combat global recession, and are retaining defensive positions, according to Merrill Lynch's Survey of Fund Managers for November.

The survey shows that four out of five investors believe that the world will continue to experience recession over the coming year. Policy makers have offered fiscal stimulus packages, liquidity and interest rate cuts, but investors are not yet ready to give their policies the benefit of the doubt. Forty percent of the panel still believe that monetary policy is "too restrictive" and asset allocators remain overweight cash and bonds relative to equities.

Global equity markets continue to struggle with high levels of risk aversion and currency market volatility. The November survey showed investors believed the Japanese yen was "overvalued" for the first time in over five years.

Equity investors are turning to U.S. equities, where the outlook for corporate profits is the "most favourable": a net 36 percent of asset allocators are overweight U.S. equities, the most widespread exposure to U.S. stocks in more than a decade. In contrast, asset allocators are underweight European and Asian equity markets.

Concern at the macro economic outlook of China was evident. A net 85 percent of panellists who focus on Asia or emerging markets expect the Chinese economy to weaken in the next 12 months. At the same time, Asian and emerging market investors favour China over any other country in their universe and have been moving into the market in force. A net 67 percent of regional respondents are overweight Chinese equities, up from an underweight position just three months ago.

Action by the European Central Bank and the Bank of England to cut interest rates has failed to lift either the sense of pessimism about Europe's economy or prospects for the region's equities. The eurozone is at the bottom of the list of regions that investors would most like to overweight.

In spite of policy measures, a gross 89 percent of investors expect Europe's economy to be in recession in the next 12 months, up from a gross 23 percent in June. Furthermore, a net 58 percent still say that Europe's monetary policy is too restrictive, suggesting a focus on rapidly slowing growth, rather than inflation. In June, more than half believed that inflation would be higher over a 12-month period. However, in November's survey, 92 percent of panellists expect inflation to be lower 12 months from now.

Against a background of unprecedented market volatility, European investors have made big changes to their asset allocations over the past month, delivering a textbook recessionary asset allocation.

European asset allocators are overweight Food & Beverages for the first time in the history of the survey. A net 47 percent of the panel is now overweight the Healthcare/Pharmaceutical sector, with investors moving out of cyclical sectors such as Basic Resources and Chemicals.

A total of 180 fund managers participated in the global survey from November 7 to November 13, managing a total of U.S. $536 billion. A total of 149 managers participated in the regional surveys, managing U.S. $334 billion. The survey was conducted with the help of market research company Taylor Nelson Sofres (TNS).

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