BofA Merrill Lynch Fund Manager Survey Shows Increasing Number of Investors Anticipating Recession in Europe by EON

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									BofA Merrill Lynch Fund Manager Survey Shows
Increasing Number of Investors Anticipating
Recession in Europe
Risk Appetite Plunges to Lowest Levels Since Early 2009

September 13, 2011 08:33 AM Eastern Daylight Time 

NEW YORK & LONDON--(EON: Enhanced Online News)--Investors expect Europe to fall into recession in the
next 12 months, according to the BofA Merrill Lynch Survey of Fund Managers for September.

Fifty-five percent of European fund managers now see the region suffering two quarters of negative real GDP growth
over the next year, according to the survey completed between September 1 and September 8. This compares with
only 14 percent expecting the same fate as recently as July.

Europe’s sovereign and banking challenges dominate risks identified by global asset allocators. Sixty-eight percent of
survey respondents now view the eurozone debt crisis as the largest of these risks, up from 43 percent in June and
60 percent in August. Sentiment towards European banks is at its lowest since the survey began asking about it in
January 2003.

These negative views of Europe are reflected in investors’ stance on eurozone equities. While the weaker growth
outlook is reflected in global fund managers’ first net underweight (5 percent) on equities in over two years, a net 38
percent are now underweight European stocks – up from a net 15 percent last month.

While other regions also suffered, sentiment towards the U.S. improved somewhat. Only a net 9 percent of U.S.
fund managers now expect the economy to weaken in the next year. Global investors also restored an overweight
position in U.S. equities.

“The survey shows that sentiment on Europe is now so negative that contagion risk to the rest of the world has risen
significantly,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research. “The
current very extreme levels of risk aversion indicate that it is time to look for contrarian trades,” said Michael
Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research.

Risk aversion soars

As measured by the ML Risk & Liquidity Composite Indicator, investors’ aversion to risk has soared to levels last
seen in March 2009 in the wake of the global financial crisis. A net 45 percent of investors are taking lower risk than
normal relative to their benchmarks, up nearly 20 percentage points from August.

Cash holdings remain notably high at an average 4.9 percent of portfolios, with more than one-third of investors
overweight cash.

Reduced risk appetite is also evident in hedge funds’ exposures. The sector has cut its net long position to 19
percent, down from 33 percent a month earlier. Investors’ assessment of market liquidity has also turned to a net
negative.

Sentiment towards bonds has improved as investors have turned negative on equities. Global asset allocators have
halved their underweight in the asset class in just two months – from a net 45 percent in July to a net 21 percent
now. Other asset classes also benefited from a shift out of equities. Most notably, the global underweight in real
estate halved month-on-month, to a net 7 percent.

The growth slowdown has altered investors’ view of oil. A net 14 percent of respondents view the commodity as
overvalued, up from a net zero percent in August.

Within equities, the story is not one of a simple rotation into defensive sectors. While consumer staples,
pharmaceuticals and utilities all benefited from the exodus from banks – to a net 47 percent underweight – so did
industrial and technology shares.

Japan, China take eurozone knock-on

As Europe’s outlook has weakened, investors have lost confidence in other regions too. Views of the Japanese
economy have soured significantly, for example. A net 42 percent of Japanese fund managers expect it to strengthen
in the next year, down from a net 75 percent a month earlier. A net zero percent expects Japanese corporate
earnings to improve in the period, compared to a net 58 percent in August.

Similarly, a net 30 percent of regional fund managers expect the Chinese economy to weaken over the next 12
months. August’s figure was a net 11 percent.

This is reflected in a sharp decline in asset allocators’ enthusiasm for Chinese equities. Having ranked as their net
most preferred BRIC stock market for the previous three months, China plunged almost 30 percentage points on
this measure in September. It now has the same net 18 percent reading as Russia.

Fiscal policy finds focus

With inflation fears having largely receded, investors have turned their focus to fiscal policy. A net 23 percent view it
as too restrictive for the current phase of the business cycle, compared to the net 19 percent who viewed it as too
stimulative just two months earlier.

Survey of Fund Managers

An overall total 286 panelists with US$831 billion of assets under management participated in the survey from 1
September to 8 September. A total of 203 fund managers, managing a total of US$648 billion, participated in the
global survey. A total of 163 managers, managing US$414 billion, participated in the regional surveys. The survey
was conducted by BofA Merrill Lynch Research with the help of market research company TNS. Through its
international network in more than 50 countries, TNS 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.

The BofA Merrill Lynch Global Research franchise covers more than 3,300 stocks and 1,000 credits globally and
ranks in the top tier in many external surveys. Most recently, the group was named No. 1 in the 2011 Institutional
Investor All-Asia, All-China and All-Japan surveys, marking the first time a single institution simultaneously tops all
three surveys. The group was also named No. 2 in the inaugural Institutional Investor Emerging Markets Equity and
Fixed Income survey, covering Emerging Europe, Middle East and Africa; No. 3 in the 2011 All-Brazil Research
team survey; No. 2 in the 2011 All-Latin America Research team survey; and No. 3 in the 2010 Institutional
Investor All-America Equity, All-America Fixed Income and All-Europe Research team surveys.

In addition, the group was ranked the No. 1 Pan-European firm for Equity Sectors Research and the No. 2 Pan-
European firm for Equity and Equity-Linked Research in the 2011 Extel survey, both for the second consecutive
year. The group was also the winner of the Emerging Markets' magazine EM Research Global Award for 2010.

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and individuals around the world. Bank of America offers industry-leading support to approximately 4 million small
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