Optimism on U.S. Stocks at 6-year High, Merrill Survey Shows

By Sarah Jones

Aug. 13 (Bloomberg) -- Optimism on U.S. equities jumped this month to the highest in six years on the outlook for earnings and as a record number of investors said the nation's currency was undervalued, a Merrill Lynch & Co. survey showed.

Even so, money managers, who together oversee $611 billion, grew more pessimistic on global growth as almost one in four said the world economy is now in a recession, reducing concern about inflation to the lowest since 2001.

``People believe that the credit crunch is no longer just U.S.-centric,'' said David Bowers, a consultant to Merrill, at a press briefing in London. ``There is a belief that the U.S. has already discounted a lot of the bearish news and is now starting to look attractive.''


The Standard & Poor's 500 Index has tumbled 12 percent so far this year, outperforming Asia and Europe, spurred by the Federal Reserve's efforts to cut borrowing costs. The MSCI Asia Pacific Index and Europe's Dow Jones Stoxx 600 Index have both lost more than 20 percent, as oil surged past $147 a barrel and global credit losses at banks topped $500 billion.

A net 12 percent of the respondents surveyed in August said they were now ``overweight'' U.S. equities, the highest reading since 2002. That compares with 7 percent in July, the survey showed. An ``overweight'' position means investors should hold more stocks than represented in benchmarks.

The outlook for corporate profits was ``most favorable'' in emerging markets, followed by the U.S., the survey showed. A net 31 percent of respondents said earnings in developing countries were most favorable. Eighteen percent picked the U.S.

`Better Placed'

``There is a strongly held view that U.S. assets are relatively better placed,'' said Bowers. ``The U.S. is moving into positive territory.''

More than half of investors said the U.S. dollar was undervalued, while a net 53 percent expect the currency to appreciate over the next 12 months.

U.K. equities remained the least-preferred market among the five regions, followed by Europe and Japan. A net 35 percent of respondents were underweight the U.K., while 27 percent were underweight European stocks.

The percentage of those believing the global economy is currently in a recession climbed in August to 24 percent, up from 20 percent the previous month. More than half believe the global economy will slow in the next 12 months.

The deterioration in economic growth also prompted investors to reduce the outlook for rising costs. A net 18 percent said global core inflation will fall in 12 months, a level not seen since 2001. That compares with 3 percent last month who expected inflation to rise and 33 percent in June.

``Inflation is yesterday's story,'' said Karen Olney, the London-based head of European equity strategy at Merrill.

The survey was conducted between Aug. 1 and Aug. 7.

Bowers, joint managing director at Absolute Strategy Research Ltd. in London, continues to produce the study after leaving Merrill. He had been chief global strategist at the brokerage.

To contact the reporter for this story: Sarah Jones in London at sjones35@bloomberg.net.