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It sure is gloomy out there


Global fund managers are about as pessimistic about economic growth and corporate profits as has ever been recorded in the monthly Merrill Lynch & Co. Inc. survey. A small percentage even believe a global recession is already under way.

Just 11 per cent of respondents expect that the global economy will grow stronger in the next 12 months and almost all of those look for only a slight improvement. Seventy-four per cent see the economy weakening, up from 67 per cent in the November survey.

And when it comes to the outlook for corporate profits, 73 per cent anticipate that profits will deteriorate either slightly or strongly over the next year.

Global fund managers and asset allocators this year have ascribed to the idea that the U.S. economy could stumble in the face of the subprime mess, but would not bring down the rest of the world with it. And as such, they favour stocks over bonds, and growth assets, particularly emerging market assets, over value plays such as financials, a strategy that has worked well for much of the year, but not recently.

Karen Olney, chief European equities strategist at Merrill, commented that "given how pessimistic investors now are about the prospects for the global economy and for corporate profits, there must be a risk that this 'decoupling' thesis could face its sternest test in 2008."

Ms. Olney added "what is especially disturbing this month is the sharp rise in the number of regional fund managers that expect Chinese economic growth to slow - something that sits uncomfortably alongside asset allocators' overweighting of emerging market equities."

Forty per cent of the respondents to the accompanying regional surveys look for the red-hot Chinese economy to slow in the next 12 months, up from 26 per cent in November and 14 per cent in October.

More than a third of respondents to the global survey indicated they would most like to overweight global emerging markets over the next 12 months, down from 39 per cent in November. Only the U.S. came close to having that appeal, at 32 per cent, a big jump from 14 per cent last month.

The attraction of Europe for investors has fallen significantly since the last survey with just 15 per cent most wanting to overweight that area, a drop from 22 per cent in November.

What also seems at odds with the fund managers' views on emerging markets is that they see the materials sector as the most overvalued. Pharmaceuticals are seen as the most undervalued.

A total of 195 institutional investors managing $689-billion (U.S.) in assets participated in the global survey conducted between Dec. 7 and Dec. 13. Another 172 managers who handle $439-billion in assets took part in the regional surveys.

Interestingly, despite the volatility and the sharp declines recorded in some stocks in the last month or so, the percentage of managers who are overweight cash has risen only slightly over the last month. And the managers are sticking to the view that global equity markets are either fairly valued or undervalued, while almost half consider global bond markets overvalued.


How do you think the global economy will develop over the next 12 months?

% sayingDec.Nov.Oct.Sept.
Get a lot stronger1010
Get a little stronger10151314
Stay the same14181723
Get a little weaker62596455
Get a lot weaker12857
Net % saying stronger-62-51-55-48

On a 12 months. view, which region would you most like to overweight/underweight?

% saying:

Most over-weight

Dec. Nov. Oct.
Global emerging market343940

Most under-weight

Global emerging market171413


Global emerging market172527


© 2007 The Globe and Mail. All rights reserved.

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