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Is a Global Recovery Coming?

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Institutional investors say they’ve lost all faith in a global recovery and their expectations for growth, profits, and prices have diminished, according to a Merrill Lynch fund manager survey conducted August1 through August 8. The monthly survey included 292 institutional investors, who manage more than $706 billion in funds worldwide.

In July, many managers said they were hopeful a recovery could deliver 10% growth in global earnings per share (EPS), but by August they were less optimistic, saying 2002 global EPS growth was more likely to be around 7%.

“Institutional managers are closing their cyclical positions,” says David Bowers, Merrill Lynch’s chief global investment strategist and author of the study, in a company press release. “They’ve lost confidence in the recovery and now see cost-cutting as the prime driver for earnings growth. But they are still hoping that we are close to a bottom for equity markets, and continue to see value in world stocks.”

In addition, fund managers are becoming more conservative, saying they have become reluctant to “buy on the dips,” according to the survey. Should the overall market fall 10% in the next three months, only 69% would buy stocks, compared to 79% last month.

However, 62% believe world stock markets will be higher a year from now, and a third are still anticipating double-digit returns from equities over the next 12 months. “Fund managers remain surprisingly hopeful despite the equity selloff of the past three months,” Bowers says.

Thirty-four percent of those polled also say global equity markets are undervalued, while one in four fund managers believes equities are undervalued by at least 15%. Regional expectations have also changed since last month’s survey. The United States equity market is still perceived as negative, with 29% of fund managers saying that U.S. equities have the worst outlook for corporate profits, compared to 36% last month. In addition, 31% still think the U.S. has the worst quality of earnings as opposed to last month’s 34%.

Non-U.S. markets were also an object of concern, according to the survey. Many of the institutional investors indicate increased signs of skepticism about European corporate profits, and wonder whether Japanese equities are relatively expensive. There is also concern that emerging markets are not so cheap after all.

Staff Editor Megan L. Fowler can be reached at [email protected]