Bears Retreat As Bullish Tilt Spreads

Bears Retreat As Bullish Tilt Spreads
Paul Katzeff
Thursday April 16, 2009, 7:36 pm EDT

Glaciers continued to melt. But investors were not quite ready to declare the Ice Age over in the April Merrill Lynch survey of global fund managers.

Optimism about growth reached its highest since early 2004. A net 24% of managers said the global economy will strengthen in the next 12 months.

Last month the percentage of managers who expected global growth equaled the portion who forecast worsening GDP. In January a net 24% forecast further contraction.

"March's apocalyptic bearishness has been replaced by reluctant bullishness," said Michael Hartnett, co-head of Banc of America Securities-Merrill Lynch international investment strategy.

Managers believe the worst is over in terms of the global slowdown. "But there is no bull market euphoria," Hartnett said.

China remained the main catalyst for optimism. The U.S. was a key too. But the brighter outlook broadened to include Europe and Japan.

In March a net 1% of managers feared China's economy would slow in the year ahead. This month 26% see China growing.

Going forward, bulls will be watching for signs that economies are responding to government stimulus steps, Hartnett said.

Bears will win if China slows more than expected and banks disappoint.

Sentiment regarding bank stocks finally warmed, as 26% of managers said they are underweight. Underweights hit a record 48% in March.

"That has triggered a classic rotation out of defensive sectors like consumer staples, telcos, pharmas and utilities, into cyclical sectors like consumer discretionary, industrials and materials," Hartnett said.

Technology is now the most popular global sector, he added.

Another sign of growing appetite for risk: the percentage of managers overweight in cash fell to 24% from March's 38%.

Also, the average cash balance fell to 4.9% from 5.2%.

And the portion of managers underweight in equities fell to 17% vs. 41% in March.

Pessimism about corporate profits continued to fall. Only 12% of managers this month saw slower profit growth vs. 29% last month. Pessimism peaked at 74% in October.

A warmer outlook regarding GDP and corporate profit growth impacted views on inflation. The portion of managers expecting inflation to fall over the next 12 months slipped to a net 18%. Last month 42% expected lower inflation.

That was also reflected in the net 16% who expected higher short-term interest rates within 12 months vs. 17% expecting the opposite last month. April's was the first view for higher rates in 10 months.

The portion of managers who view stocks as undervalued dropped to 30% from March's 42%.

That hurt the outlook for bonds, with only 9% of managers overweight in April vs. March's 26%. In April, 37% saw bonds as overvalued, the same as March's view.

Managers boosted their stakes in emerging markets, with a net 26% overweight vs. 4% a month ago.

The U.S. was the only other region where managers were overweight, at 14% of managers.

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