Merrill Lynch Survey: Fund Managers See Economic Negatives

Merrill Lynch says fund managers it surveyed in December are more pessimistic about corporate profits than they have been in nearly a decade. Seventy-four percent believe we are in a late cycle phase of business expansion while four percent believe the economy has already entered global recession, the firm says.

But on the bright side, I dug into the survey's findings and there were 73 percent of 195 managers who responded who believe it is unlikely there will be a global recession over the next year, and 52 percent expect inflation will be unchanged or even slightly lower over the next 12 months.

But Merrill says the expectations for economic growth and corporate profits are now among the most pessimistic it ever recorded in its global survey. The survey's indicator of growth expectations fell to a reading of 20 in December, from 25 in November, a big drop and one of its lowest readings ever. Sixty-two percent of the managers expect the global economy to weaken over the year.

The outlook for corporate profits is most favorable in emerging markets according to 68 percent of those surveyed, and the U.S. has the least favorable outlook. Eighty percent say double digit growth will be scarce in 2008 and cost cutting is expected to be the primary source of earnings growth.

Despite their concerns, the survey shows fund managers are sticking with their strategy that stocks are relatively cheaper than bonds. Thirteen percent now see stocks as undervalued compared to five percent in November, and the number who see bonds as overvalued has risen to 43 percent from 40 percent. A net 21 percent of the managers remain overweight in cash. Ten percent of the managers also believe equity volatility will be higher a year from now.

The managers are increasingly concerned about China's growth, yet many overweight emerging market equities. A loser was Eurozone equities. Just 19 percent are now overweighting European stocks compared to more than 50 percent six months ago. The managers' view turned the most bearish on U.K. stocks.

Here are some findings:

*25 percent see the U.S. stock market as the most overvalued
*32 percent would overweight the U.S. stock market in next 12 months
*36 percent see global emerging markets as most overvalued
*34 percent would overweight emerging stock markets in next 12 months
*24 percent see Japan as most undervalued
*20 percent each see Eurozone and emerging markets most undervalued
*52 percent see the U.S. dollar as undervalued
*56 percent see the yen as undervalued
*67 percent see sterling overvalued
*64 percent see euro overvalued

Questions? Comments?