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[nicolasillo]

Investors 'in denial' on extent of downturn - Merrill Lynch UPDATE Date 19/9/2007 Source AFU Related Stories N/A Time 12:58 (Updating to add details from survey on sector, regional preferences) LONDON (Thomson Financial) - Investors may be 'in denial' about the extent of the current financial market crisis, acknowledging they are worried about business cycle risk but failing to price in the possibility of a global recession, a Merrill Lynch survey showed. Despite a major rethink on the outlook for economic growth and corporate profits, few believe a recession is likely and they still believe equities are cheap relative to bonds, Merrill Lynch's September survey of fund mangers showed. 'Investors say they are worried about business cycle risk, but asset allocators have yet to start reshaping their portfolios for a different environment,' said David Bowers, independent consultant to Merrill Lynch. 'This begs the question of whether they are in denial about the possible extent of the downturn,' he said. In a question on what investors consider the biggest risks to financial stability, 61 pct of those polled cited the business cycle, behind only credit or default risk and counterparty risk and a huge jump from just 32 pct in August. This does not sit too comfortably with the fact that only 14 pct believe a global recession is likely over the next 12 months, nor with the fact that despite everything a majority believe that the current financial turmoil is creating value for equities. The survey showed a net 23 pct of asset allocators think equities are undervalued, a jump from 11 pct in August, while two thirds are underweight on bonds. Bowers believes investors who are acknowledging a significant risk posed by the business cycle could be being too complacent in their accompanying investment decisions. 'No one is positioning for a recession... Looking at the survey you get a sense that people thought here was a great buying opportunity,' he said. 'It shows people are becoming more concerned about the longer-term consequences of the credit crunch but they are not yet willing to throw in the towel'. Investors are not willing to give up on equities, perhaps because they believe central banks will come to the rescue. The survey was completed on Thursday last week, before the Federal Reserve's decision to cut interest rates by 50 basis points and Bowers said markets will for the time being 'feel vindicated by what the Fed has done' as equity markets have rebounded sharply. The survey nevertheless showed a significant change in the outlook for economic growth and corporate profits. The net balance of investors expecting the global real economy to weaken over the next 12 months jumped to 48 pct in September from 26 pct in August, while those expecting corporate profits to deteriorate rose to 55 pct from 28 pct. Monetary policy is now no longer seen as stimulative and inflation is no longer a worry, while risk aversion 'has begun to approach extreme levels', showing its second worst reading in the survey's history. In Europe meanwhile, Merrill's regional survey revealed an even bigger swing, with 45 pct of European fund managers now forecasting that the economy will be weaker in twelve months time compared with 21 pct who felt it would be stronger last month. This is the lowest reading in a decade and worse even than in the aftermath of 9/11. On sector positioning, the survey showed investors have responded to the market turmoil by slashing their holdings in sectors which are sensitive to interest rate movements or credit risk, particularly banks but also autos, travel and leisure and financial services. Meanwhile, stocks that are seen as offering good value are those whose balance sheets are good and who have good exposure to the East, where prospects are still seen as solid. These sectors include oil and gas, basic resources, technology and insurance, which Merrill Lynch believes is not exposed to the same risk as banks. Merrill Lynch chief European equity strategist Karen Olney believes, however, that sentiment towards banks has got so low that they look set for a rebound, although she warned this would be no more than a relief rally, not a long-term rally. The survey showed the proportion of fund managers describing themselves as underweight on banks more than doubled to 47 pct from 23 pct in August. 'With this degree of pessimism it is hard to get much lower,' she said. Elsewhere, the survey also showed investors continue to favour emerging markets and euro zone equity markets in the midst of the current market upheaval, while shunning US and UK stocks. A net 36 pct of allocators are overweight on emerging market equities, a return to the levels of July after a 10 percentage points dip in August, while a net 37 pct are overweight euro zone equities, in line with August's levels. Allocators have become less positive about Japan's prospects, however, because of the stronger yen and doubts over the country's economic recovery. A net 14 pct are now underweight Japanese equities compared with 8 pct being overweight in August. jessica.mortimer@thomson.com jkm/slj/jkm/slj COPYRIGHT Copyright Thomson Financial News Limited 2007. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.

[nimblebear]

Its likely gonna be awhile before investors buy into the notion that the market could do anything but go up. Vix certainly got high in the recent downdraft but it could still go higher.