Investors are most risk averse since 2003: Merrill

Investors this month were the most risk adverse since the bull market began as prospects for economic growth deteriorated to a nine-month low, a Merrill Lynch & Co. survey showed.

Forty-eight per cent of respondents to the poll conducted between September 7 and September 13 said their willingness to take on investment risks was ``lower than normal,'' the biggest percentage since about March 2003. Rising defaults is seen as the greatest threat to financial markets, the survey showed.

``People are a little more concerned about the so-called credit crunch,'' said David Bowers, a consultant to Merrill, the world's third-largest securities firm. He spoke at a press briefing in London today. ``Risk aversion is extreme. Growth expectations have fallen very, very sharply.''

The net balance of investors who expect the global economy to weaken in the next year surged to 48 per cent this month, the highest since December, according to the survey, which questioned 188 respondents that together manage $615 billion. That compares to 26 percent in August.

Even so, the Morgan Stanley Capital International World Index has rebounded 7.2 percent since slumping to a five-month low on Aug. 16, boosted by speculation the US Federal Reserve would cut interest rates to prevent a recession. The central bank yesterday lowered its benchmark lending by an unexpected 50 basis points, sparking a rally in global equities. Thirty-five percent of money managers said equities were ``undervalued,'' according to the survey. That's up from 22 percent in August, and the highest reading since around mid-2003.

"Fund managers probably feel a little vindicated by what the Fed has done,'' said Bowers. ``There is still a reluctance to give up on equities.''

Forty-six percent of respondents said they were ``overweight'' equities in September, down from 49 percent last month. Twenty percent said they were ``underweight.'' An ``overweight'' stance means investors hold more of the securities than are represented in asset-allocation models.

The outlook for earnings growth deteriorated to a one-year low.

Sixty-eight percent of survey respondents said they expect corporate profits to weaken over the next 12 months, the highest percentage since September 2006 and an increase from 51 percent in August.

Investors' average cash holding was little changed in September at 4.3 percent of total assets. That's down from 4.4 percent, which was the highest since March.

The euro zone, made up of the countries that share the currency, and emerging markets remain investors' favorite regions for equities. The U.S. is still the least favoured.

Euro-Region

A net 37 per cent of investors were ``overweight'' euro- region shares in September, up from 35 percent. The net percentage of investors who are ``overweight'' emerging-markets equities jumped to 36 percent from 26 percent last month. A net 30 percent said they are ``underweight'' in U.S. stocks, up from 20 percent.

Bowers, joint managing director at Absolute Strategy Research Ltd. in London, continues to produce the study after leaving Merrill in August. He had been chief global strategist at the brokerage since 2000. Merrill is a passive, minority investor in Bloomberg L P, the parent of Bloomberg News.