A low growth environment and a return to fair value in equities are the conclusions drawn from the monthly Merrill Lynch survey of fund managers. Of the respondents, 50% think stock markets are fairly valued, while 20% say they are over-valued.
“The value has been taken out in the rally over the past three months,” explains David Bowers, chief global strategist at Merrill Lynch. “If there is going to be additional source of liquidity, it will be from people selling bonds to put the cash into equities.”
And with volatile currency movements between the US and the Eurozone, Bowers warns European corporates to take note: “I think for many European companies this year, the question is: ‘Do you know how to hedge?’ How prepared are Eurozone companies for volatile currency change between the dollar and euro?”
At the most fully-invested position for the past three years, fund managers have an average cash balance of less than 4%, and unsurprisingly, more than half would prefer companies to reduce corporate debt levels, rather than embark on ambitious growth programmes.
But Bowers strikes a note of caution for the equity optimists. “Before fund managers end their love affair with bonds and switch into equities they need to see much more compelling evidence for an upswing in the world economy.” The modest response that nominal GDP growth for the G7 area is expected to increase from 3.1% to 3.3% may not be a strong enough fillip.
