Merrill Lynch Fund Manager Survey Finds Investors Most Underweight Equities in a...

Merrill Lynch Fund Manager Survey Finds Investors Most Underweight Equities in a Decade

Europe bears brunt as allocations reach new extremes
NEW YORK & LONDON--(Business Wire)--
Asset allocators have taken their most negative stance towards
equities in a decade, with a net 27 percent underweight the asset
class in June, according to this month's Merrill Lynch's Survey of
Fund Managers.

Investors' fears of stagflation have crystallised as they face up
to the possibility that interest rates might have to rise as the
global economy slows. They have acted by reducing exposure to both
equities and bonds and moving into cash. This month's survey reflects
a world where global growth and profit expectations are deteriorating.
At the same time, fears of higher inflation, and subsequent higher
interest rates, are rising. Just 1 percent of respondents believe
equities are undervalued, down from 25 percent in March. A net 81
percent of the panel believes consensus earnings estimates for the
next 12 months are too high. A net 42 percent of asset allocators are
overweight cash, up from a net 31 percent in May.

"The market is waking up to the idea that global interest rates
are too low, in fact they remain below inflation," said Karen Olney,
chief European equities strategist at Merrill Lynch. "Negative real
rates are hardly an antidote to inflation. Merrill Lynch expects a
double rate hike from the European Central Bank (ECB) by October and
would expect other central banks to follow."

Sentiment towards Eurozone turns around

Europe has taken the brunt of investors' shift away from equities.
Over the past 12 months, the Eurozone has moved from most to least
favoured. A net 29 percent of investors said this month that the
Eurozone is the region they would most like to underweight on a 12
month view.

Asset allocators have already moved aggressively out of Eurozone
equities. A record net 22 percent said they are underweight - the most
negative stance taken in the past 10 years. Not only has the Eurozone
the least favourable corporate profit outlook, but the quality of
earnings has been slipping too. This, in turn, is reducing any
perceptions that Eurozone equities are undervalued. Also fuelling
their negative stance are concerns about the currency. A net 71
percent of asset allocators believe that the euro is overvalued - a
particular concern for a region heavily dependent on exports.

Amid these concerns, European fund managers have been moving into
cash. A net 34 percent of European investors said they were overweight
cash in June's regional survey, up from 3 percent in April.
Furthermore, a growing number recognises that higher interest rates
are likely. In February, half of European respondents believed ECB
monetary policy to be too restrictive. That number fell to a net 10
percent this month.

Any bearish tendencies towards the Eurozone are, however, dwarfed
by the negative stance global investors are taking towards the U.K. A
net 38 percent of asset allocators are underweight U.K. equities,
again the most negative stance in a decade. Investors' attitudes
towards the U.K. are also shaped by fears over sterling. Even after an
11 percent fall in sterling's trade weighted index over the past 12
months, a net 56 percent of asset allocators still believe the
currency to be overvalued.

Europeans go long Oils/short Banks

The popularity gap between the booming oil industry and the
beleaguered banking sector has reached unprecedented levels in the
eyes of European investors. A net 62 percent of respondents are
overweight Oil and Gas (up from a net 29 percent in April). At the
other end of the spectrum, a net 62 percent are underweight Banks (up
from a net 21 percent in April).

"The burning question is when to sell oil companies and move back
to banks," said Karen Olney. "Fundamentals absolutely support Oils
over Banks. The sector has the strongest earnings momentum in Europe
and is also among the cheapest." Merrill Lynch forecasts an average
price of U.S.$121.50 per barrel in the second half of 2008 and an
average price in 2009 of U.S.$107 per barrel.

Aftershock of credit crunch takes grip

The credit crunch is losing its sting as the greatest single
threat to financial market stability. The net percentage of investors
citing "credit risk" as the number one threat has fallen from 95
percent three months ago to 81 percent in June. But inflation is the
fastest growing concern. A net 65 percent of respondents cite
"monetary risk" as the greatest threat, up from a net 23 percent in
May.

"For the first time in our memory, inflation, not growth is the
primary macro driver at the global level, in our view. The inflation
shock has already happened," said Alex Patelis, head of international
economics at Merrill Lynch. "What matters now is how persistent it is
and how markets and policymakers react; at a global level this begs
for an accident that will awaken markets and policy makers to the
risks."

NOTES TO EDITORS

A total of 204 fund managers participated in the global survey
from 6 June to 12 June, managing a total of U.S.$718 billion. A total
of 185 managers participated in the regional surveys, managing
U.S.$454 billion. The survey was conducted with the help of market
research company Taylor Nelson Sofres (TNS). Through its international
network in more than 50 countries, Taylor Nelson Sofres provides
market information services in over 80 countries to national and
multi-national organizations. It is ranked as the fourth-largest
market information group in the world. Survey results were analysed by
David Bowers, who is joint managing director of Absolute Strategy
Research Ltd, a financial services consultancy.

Merrill Lynch Global Research has consistently achieved high
rankings for its equity and fixed income research in numerous regional
and global investor surveys, such as Institutional Investor, The Wall
Street Journal, LatinFinance, Asiamoney, Euromoney, Extel and Reuters.

Merrill Lynch is one of the world's leading wealth management,
capital markets and advisory companies, with offices in 40 countries
and territories and total client assets of approximately $1.6
trillion. As an investment bank, it is a leading global trader and
underwriter of securities and derivatives across a broad range of
asset classes and serves as a strategic advisor to corporations,
governments, institutions and individuals worldwide. Merrill Lynch
owns approximately half of BlackRock, one of the world's largest
publicly traded investment management companies, with more than $1
trillion in assets under management. For more information on Merrill
Lynch, please visit www.ml.com.

Merrill Lynch
Research Communications:
New York
Susan McCabe Walley, +1 212-449-0389
susan_mccabe@ml.com
or
London
Tomos Rhys Edwards, +44 (0)20 7995 2763
tomos_edwards@ml.com

Copyright Business Wire 2008