Fundies get defensive

Investors are increasingly risk averse, increasing their allocations to defensive stocks amid fragile market confidence.

A Merrill Lynch global survey of fund managers for July showed investors have a reduced appetite for risk and are returning to “recession-proof stocks”.

The results showed average cash balances rose from 4.2 per cent to 4.7 per cent last month, while a net 11 per cent of survey respondents had shifted to overweight pharmaceuticals, in comparison to net 2 per cent underweight the sector in the previous month.

Merrill Lynch also reported an uptick in exposure to staples and telecoms, while overweight materials, “a highly cyclical sector”, fell substantially, and world equity markets dropped by 4.9 per cent in early July.

Merrill Lynch noted an increase in allocations to equities in emerging markets, with a net 48 per cent of respondents saying that emerging markets was the region for which they would most like to be overweight — up from 11 per cent in June.

Investors showed greater negativity about European and US equities, with a net 30 per cent saying they “would most like to underweight the euro zone — the worst reading on the region since 2001” and a net 9 per cent wanting to underweight US equities.

“Decoupling is having a sequel. Investors are very overweight emerging market equities while at the same time underweight every other region,” said Michael Hartnett, chief global equities strategist, Banc of America Securities-Merrill Lynch.

Meanwhile, European respondents are increasingly defensive in their equity allocations, despite their conviction the recession will be over soon.

“European investors’ defensiveness has left them overweight just four out of 19 sectors. If the macroeconomic outlook is correct, these extreme underweight positions are looking unsustainable,” said Patrik Schowitz, European equity strategist, Banc of America Securities-Merrill Lynch.