The August swoon in global stock markets and the problems in credit markets may have rattled some global fund managers, but they aren't making wholesale changes in the way they approach the equity markets, apart from holding relatively high cash levels and becoming more risk averse.
The latest monthly survey by Merrill Lynch & Co. Inc. shows that while institutional investors may fret about the global economy and profits, only 14 per cent of respondents felt a recession is very likely or fairly likely over the next 12 months.
Only one in four believe that global corporate profits will likely, or are fairly likely, to rise 10 per cent or more over the next 12 months. That is down from almost one in three last month and more than four in 10 in July.
"Investors say they are worried about business cycle risk, but asset allocators have yet to start reshaping their portfolios for a different environment," said David Bowers, independent consultant to Merrill Lynch. "This begs the question of whether they are in denial about the possible extent of this downturn," he added.
The survey was conducted between Sept. 7 and Sept. 13 and involved 188 fund managers handling $615-billion (U.S.) in assets. Another 183 managers handling $434-billion participated in the regional surveys.
Two-thirds of asset allocators remain underweight bonds and they continue to favour emerging market and euro zone equity markets while shunning British and U.S. issues. In fact, more are now overweight emerging market stocks than were in August.
In addition, despite the concerns about the possibility of an economic slowdown and deteriorating corporate profits, the institutional investors still prefer sectors with a cyclical bias, with their top three choices being technology, energy and industrials.
In July, 70 per cent of the respondents believed that global equity markets were fairly valued, while just 13 per cent considered them undervalued. Now, after the August selloff, 52 per cent think the markets are fairly valued and 35 per cent believe they are undervalued.
As for the bond markets, the investors overwhelmingly continue to view them as either fairly valued or overvalued.
© 2007 The Globe and Mail. All rights reserved.
Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.
Discover a wealth of investment information and and exclusive features.