Investment Strategies

Never Mind The Volatility: Merrill Lynch Keeps Faith With Equities, High-Yield Debt

Thomas Whyel London 23 June 2011

Never Mind The Volatility: Merrill Lynch Keeps Faith With Equities, High-Yield Debt

In the face of a likely short-term correction, Merrill Lynch is taking a long-term view by holding on to equities and high-yield debt, its chief investment officer has said in a note.

As QE2 is about to end, the Greek melodrama continuing well into July and no clear progress on raising the US federal debt ceiling before the binding deadline of 2 August, the odds are on for a fretful, volatile summer, says Bill O’Neill.

Coupled with the lowest manufacturing sentiment in nearly two years, as the US Philadelphia Federal Reserve index dropped to -7.7 in June from 3.9 in May, there is a cautious view on the short-term markets.  However, as the latest Bank of America Merrill Lynch Fund Managers Survey showed, growth and profit expectations have stabilised after recent sharp falls.

Cash is certainly up and standing at its highest levels since July 2009.  In Europe, areas such as oil and gas, media and mining have outperformed in the last month, signifying a positive outlook for long-term equities and high yield debt, notes O’Neill.

He expects there to be a slight correction before markets rebound, with emerging market equities likely to outperform developed markets. The firm sees value in global banks because they look to have been oversold, while in contrast it believes gold is overbought.  BofA Merrill Lynch also believes high-yield debt and emerging market debt is attractive, especially in Brazil.  The commodities team sees oil prices subsiding with weakening demand, but higher long-term prices owing to tight supply. 

The firm is keeping a close eye on Japan’s recovery post-earthquake as there are indications that the rebound in its manufacturing and industrial sectors is well above what was expected, along with 2011 earnings downgrades likely overstating the corporate impact of the disaster. The influence on consumption is also likely to be less severe than previously expected, says O’Neill. However, in his view, political uncertainty and regulations on electricity usage do pose some risk to the rebound.

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