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Bear market sentiment is back, survey finds

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Investors have turned bearish in their outlook for the global economy and corporate earnings, according to the BofA Merrill Lynch survey of fund managers for July.

The survey shows a net 12 per cent of respondents predicting the global economy will deteriorate in the coming 12 months, the first negative forecast since February 2009.

This represents a big turnaround from June when a net 24 per cent forecast the economy to strengthen.
 
A net four per cent of the panel expects corporate profits to worsen in the coming year, also the first negative outlook in more than a year. It compares with a net 28 per cent forecasting earnings growth just last month.

A net one per cent says that profit margins will fall in the coming year, compared with a net 31 per cent predicting improved margins in May.
 
Risk appetite has dipped with investors moving into cash and reducing exposure to cyclical stocks. Cash now comprises 4.4 per cent of an average portfolio, up from 4.1 per cent in May. A net 39 per cent of the panel is taking lower than normal risk, more than double the proportion in May.

Allocations towards pharmaceuticals, a classic bear market sector, increased to the highest level since March 2009. 
 
“July’s survey echoes the sentiment that investors expressed during the recession in early 2009,” says Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research.

Investors are more concerned about the outlook for US equities than at any point since November 2006, with a net 14 per cent of the panel saying it is the region they would most like to underweight. In July a net 14 per cent said the US was the region they most wanted to overweight. Global asset allocators have already reduced exposure to the region, with net seven per cent of panel overweight US equities, down from a net 20 per cent in June.
 
Global emerging markets have been gaining in popularity while investors are also returning to the eurozone in spite of weakened economic sentiment towards China and Europe respectively.
 
A net 34 per cent of global asset allocators are overweight GEM equities, up from 19 per cent in May. A net 48 per cent of investors identify GEM as the region they would most like to overweight over the next 12 months, more than double the reading in May.

Over the same period the proportion of respondents predicting a weaker Chinese economy has surged to a net 39 per cent up from a net three per cent.

The proportion of asset allocators underweight eurozone equities has fallen to a net ten per cent, down from a net 27 per cent in June. At the same time a net 17 per cent of European investors expect the region’s economy to weaken.
 
Respondents have scaled back positions in global equities while moving into bonds in the past two months. The proportion of asset allocators overweight equities has slipped to a net 11 per cent from 30 per cent in May. The proportion underweight bonds has fallen to a net 15 per cent, down from 29 per cent in May. This is despite investors acknowledging that equities are increasingly undervalued and bonds increasingly overvalued. The spread in perceived valuations of bonds and equities is at its widest since 2003.
 
Inflation concerns have eased as sharply as growth concerns have appeared. A net 12 per cent of investors predict inflation to fall in the coming year, a turnaround from June when a net 12 per cent were forecasting higher inflation. As a result investors are pushing back the date they expect next to see a rate hike in the US or eurozone. Four out of ten respondents to the survey are ruling out any rate hike by the Fed before July 2011, and only four per cent predict an increase this year. The regional survey shows 47 per cent of European investors predict no rate hike from the European Central Bank before July 2011.

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