Asset Management

Global Investors More Convinced Recession is Likely, Shun Risks

Tom Burroughes Editor London 18 September 2008

Global Investors More Convinced Recession is Likely, Shun Risks

Global fund managers in September became more convinced that the world economy is headed for recession and risk aversion has also increased, according to the latest monthly poll of investment firms by Merrill Lynch.

Some 61 per cent of respondents to Merrill’s poll of 186 fund managers said a recession is likely in the next 12 months. The results, collected after the US government’s Federal Reserve’s takeover of Fannie Mae and Freddie Mac, but before the failure of Lehman Brothers, show that investors have adopted more defensive strategies and shortened their investment time horizons.

Liquidity conditions (depth of market and ease of trade) have worsened, with a net 39 per cent of respondents who rate conditions as negative compared with half of this amount in August.

Highlighting the flight to safety, the survey has found investors to be overweight bonds for the first time in over a decade.

“Investors care little about inflation with recession on their doorstep and the banking system under pressure,” said Karen Olney, lead European equities strategist at Merrill Lynch.  “They have made it clear that monetary policy is too restrictive and rates need to be cut.”

Investors globally rank the eurozone as their least favourite destination, with 50 per cent of global asset allocators underweight Europe, the most negative reading since the survey began.  They also say that the outlook for corporate profits is less favourable in the eurozone than anywhere else.

Highlighting reduced risk appetite is how hedge funds have become acutely more bearish in equities. Nearly one in four (24 per cent) hedge funds surveyed said that they have a net short equities position, compared with 6 per cent who held net short equities positions in August.

At the same time hedge funds are reducing, or being forced to reduce, their leverage.  The weighted average ratio of gross assets to debt fell from 1.2 times in August to 1.0 times in September.  More than half of respondents to the question have a leverage ratio of less than 1.0 times.

Investors have moved to their largest underweight position in emerging market equities since 2001, thanks to falling commodity prices, global growth concerns and residual inflation fears in emerging market economies. 

Michael Hartnett, chief global emerging markets strategist at Merrill Lynch said: “An improvement in sentiment toward the asset class will arrive once commodity prices stabilize and central banks in emerging markets ease monetary policy.”

A net 62 per cent of respondents expect the Chinese economy to weaken over the next year – one of the most pessimistic readings on record.

Fund managers overseeing a total of $641 billion of assets, took part in the survey, carried out between 5 and 11 September.

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