ANALYSIS:Even before Thursday's global market carnage, confidence among investors was plunging, writes Pronsias O'Mahony
GLOBAL FUND manager pessimism has hit levels unseen in the last decade, with institutional investors particularly wary of European market prospects.
This is the main finding from Merrill Lynch's latest monthly poll of fund managers. Sentiment is even more negative than at any time in the 2000-2002 global bear market, when share prices experienced much more severe falls. A paltry 1 per cent believe equities to be undervalued, despite the share price drops that have seen global markets experience double-digit declines in the last month or so.
In March, 25 per cent of respondents rated equities as undervalued. A net 81 per cent said consensus earnings estimates for the next year are too high.
Investors are increasingly negative towards Europe, where managers are moving out of equities and into cash. A net 34 per cent said they were overweight cash. In April, that figure was just 3 per cent. It's a far cry from what Merrill called the "EU-phoria" of 12 months ago, when Europe was the most favoured region among fund managers.
Sentiment towards British equities is even more negative, with a net 38 per cent saying that they were underweight UK stocks - the most negative result in a decade.
Housing woes continue to occupy the minds of British investors. The Construction Products Association said recently that British housing starts will likely fall to the lowest levels since the end of the second World War.
The survey, which polled 204 managers managing more than $700 billion (€444 billion) in capital, also found that a net 27 per cent were now underweight equities, a marked increase from the figure of 5 per cent recorded just last month.
The survey was conducted before Thursday's market carnage, when US indices crashed to 21-month lows. The selling was triggered by a host of factors. Goldman Sachs downgrading the financial sector and placing Citigroup on its "conviction sell" list didn't help sentiment, nor did oil hitting an all-time high following reports that Libya might cut production, and a prediction from Opec's president that the commodity might reach $170 by the summer. Add in disappointing earnings from tech giants Research in Motion and Oracle, and European financial Fortis announcing it needed to raise as much as €8 billion, and the ingredients for a big sell-off were in place.
Still, many observers are probably saying "I told you so", with dire warnings being issued in the week before last. A report by an RBS analyst warned that share prices were about to crash in the coming months, with US markets likely to fall by more than 30 per cent by October. "The very nasty period is soon to be upon us - be prepared," the report warned. It outlined "bearish repricing" driven by "massive negative revisions to growth" and "stubbornly high inflation" leading to "earnings deterioration" that would go "deep into 2009", as well as "weaker and weaker credit metrics, higher and higher defaults and ongoing problems/de-leveraging in the financial sector".
If correct, this would turn out to be one of the more severe bear markets of the last century. Since 1945, the average bear market has lasted 13 months, with prices declining by an average of 30 per cent. Some are milder, others more severe. Between 2000 and 2002, for example, the SP 500 halved in value. A bear market is ordinarily defined as a fall of 20 per cent from peak to trough, which approximates to the SP's fall since last October.
Goldman Sachs was less apocalyptic but hardly joyful in its assessment of matters last week, warning that "a broad-based rally in bank shares is unlikely in coming months". The bank, which has weathered the credit crunch better than most, said that the credit crisis will not peak until next year, with mounting losses forcing US banks to raise an additional $65 billion in capital. Financials have already been forced to raise $120 billion. "Banks will not turn until a peak in credit costs is in sight," Goldman said. "Weaker banks are unlikely to benefit from consolidation, as bank deals always slow when credit is deteriorating and larger banks are hamstrung by their own problem assets, as well as accounting requirements." It went on to cut its price targets on 14 banks.
US hedge fund superstar John Paulson added his voice to the recent bearish chorus, saying at the GAIM International hedge fund conference in Monaco that he expected financial write-downs to reach $1.3 trillion. So far, approximately $395 billion has been written down by institutions.
Paulson, who manages $33 billion and whose sub-prime debt fund rose by 591 per cent last year after he famously bet on a meltdown in the sub-prime mortgage market, said that he was neither a "bull nor a bear" but a "realist". "There are a lot of problems out there and it will continue to be felt through the year. We don't see any signs of stabilising."
Shorts such as Paulson were likely licking their lips after Thursday's slaughter. All 30 stocks in the Dow Jones Industrial Average fell, as did 98 of the SP 100 components. They were not the only eye-popping statistics - General Motors hit a 53-year low and Citigroup fell to its lowest point in a decade. This has been the worst June for US indices since the Great Depression in 1930.
