Investors Favor `Defensive' U.S. Stocks, Merrill Says

By Adam Haigh

Sept. 17 (Bloomberg) -- A record number of investors favored U.S. shares before Lehman Brothers Holdings Inc.'s bankruptcy filing and Merrill Lynch & Co. was bought by Bank of America Corp., a monthly survey by Merrill showed.

Investors turned the most negative in emerging-markets equities since 2001 and became ``overweight'' government bonds for the first time in a decade, the survey conducted Sept. 5 to 11 of money managers who oversee $641 billion showed.

U.S. stocks rose last week, ending a three-week slide for the Standard & Poor's 500 Index, on speculation the government's takeover of Fannie Mae and Freddie Mac would stabilize the global financial system. The seizure in credit markets and more than $500 billion of losses at the world's largest banks drove Lehman into Chapter 11 bankruptcy protection on Sept. 15 and also spurred Merrill's takeover by Bank of America.

``In times of fear the U.S. market tends to be treated as a defensive market,'' said Karen Olney, the London-based head of European equity strategy at Merrill, at a press conference in London.

The S&P 500 index today fell 2.1 percent to 1,186.25 as of 10:32 a.m. in New York, bringing its loss this year to 19 percent, as the worst U.S. housing slump since the Great Depression reduced earnings at financial companies and spurred speculation banks will rein in lending.

Least Favorable

On Sept. 15 the S&P 500 sank the most since the Sept. 2001 terrorist attacks in New York as Lehman's bankruptcy filing and slumping commodities prices heightened speculation credit-market losses and the economic slowdown will worsen.

Earnings for U.S. companies are the most favorable relative to other regions, according to 45 percent of respondents to the survey, up from 30 percent in August. A net 43 percent believe the dollar remains undervalued.

Profits for companies in the S&P 500 are expected to climb 25 percent in 2009, compared with a 13 percent rise forecast for earnings in the Dow Jones Stoxx 600 Index, a benchmark for European equities, according to Bloomberg data.

Emerging markets are the least favorable place to invest in equities, with the survey showing a net 14 percent of those surveyed would most like to underweight the region over the next 12 months. The MSCI Emerging Markets Index has slid 37 percent this year.

``We are still waiting for the moment to say now is a very, very good time to get into emerging markets,'' said Merrill chief emerging markets equity strategist Michael Hartnett on the phone from New York.

`Most Bearish'

Investors were overweight in bonds for the first time since 2001 as they continued to switch out of equities. Healthcare, consumer staples and telecommunication shares were favored as money managers moved out of energy, industrials and technology companies, the data show.

``It's a massive sell-off of risk,'' said Olney. ``This has to be the most bearish survey that we have ever seen.''

In the U.K., 100 percent of investors now see the economy falling into a recession in the next 12 months, which has risen from 50 percent last month.

``We are coming around to a point where a lot of that is in the price and a lot of that is in expectations,'' Olney added.

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To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net.