Investors express desire for further fiscal stimulus

Investor sentiment has stepped back from the brink of despair, but more than a third of investors want to see greater fiscal stimulus, according to Merrill Lynch’s Survey of Fund Managers for December.

While 88 percent of the panel believe that the world economy is in recession, December’s survey contains evidence that the rate of deterioration is slowing. The net balance of investors who expect the global economy to worsen in the coming year has fallen to 36 percent, down from 60 percent in October. More than a quarter of respondents believe the economy will strengthen in 2009. Cash levels average 5.5 percent, up from 5.1 percent in November, the highest level since 2001. Furthermore, a widespread perception exists that stocks are cheap, both in absolute terms and relative to bonds.

The proportion of investors who view monetary policy as too restrictive has tumbled to 29 percent from 68 percent in October. However, 37 percent of investors believe that fiscal policy is too restrictive, suggesting further stimulus dollars are needed before investors will commit cash.

“Market sentiment, high cash levels and the prospect of U.S. fiscal stimulus in January point to a possible New Year rally in equities,” said Gary Baker, head of EMEA equity strategy at Merrill Lynch. “It suggests that going into 2009 with textbook defensive positions in a small number of sectors could be dangerous.”

Preference for bonds and big four equity sectors

For the third successive month, a majority of fund managers believe equities are undervalued. But survey data also suggests that they view equities with scepticism. Many fund managers still prefer bonds to stocks, with a net 21 percent of asset allocators overweight bonds in December, compared with 7 percent in November. Problems could be in store for those who stay heavily invested in fixed income. Following the recent sharp rally in government bonds, a net 42 percent believes the asset class is overvalued.

Faced with lower growth and inflation, investors have further increased overweight positions in four global sectors: Healthcare, Telecoms, Utilities and Consumer Staples since November; 44 percent of asset allocators are overweight Pharmaceuticals and 33 percent are overweight Consumer Staples.

Europeans trimming defensive positions

European investors are showing signs of fatigue towards defensive stocks as they start to take profits in classically-defensive sectors.