As professional optimists, fund managers rarely see a glass less than half full. According to the latest Merrill Lynch survey, they now reckon emerging markets are the best antidote to the undoubtedly gloomy short term outlook in the United States. 87 per cent of the 260 institutional investors polled said the global economy will strengthen but, perhaps in post-Enron mood, only 37 per cent thought US corporate earnings were set to grow – compared with 57 per cent a month ago.
“Fund managers are no longer taking corporate earnings at face value,” said Merrill Lynch Global Strategist David Bowers, who oversees the survey. “Those surveyed said it is corporate America that appears to have lost the most credibility. This perception comes at a time when the U.S. market looks like the most expensive region globally.”
Institutional investors are turning away from the U.S. and Japan in favor of emerging markets, Mr. Bowers said. Global Emerging Markets (GEM) are preferred over any other region. According to the survey, 29% of those polled said this was the region that they would most like to overweight in the next 12 months.
“Global emerging markets remain the relatively cheapest regional play,” he said.
Despite mixed feelings about earnings, fund managers are still upbeat about global equities. The net balance of 79% of those surveyed said global stock prices would be higher in a year’s time, supported by a recovery in corporate profits. A net balance of 84% of those polled expected corporate profits to improve, with global EPS expected to grow 8% over the next 12 months.
Institutional investors are also looking to take on more risk. A net 32% of those who participated in the Merrill Lynch Fund Manager Survey, said they wanted to increase the level of risk over the next three months. This is higher than the 20% response in the January survey.
What sectors would fund managers increase or decrease over the next 12 months? The sector most preferred is cyclical services (a net 14% positive), followed by basic industries (a net 11% positive), according to the survey.