Funds see Europe recession in next year - BofA Merrill

LONDON Tue Sep 13, 2011 1:46pm BST

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LONDON (Reuters) - Europe's sovereign debt and banking crisis is expected to push the region into recession over the next 12 months, and most investors do not expect higher U.S. interest rates until 2013, a survey showed on Tuesday.

The monthly survey taken by Bank of America Merrill Lynch from September 1 to 8 showed 55 percent of European fund managers see Europe suffering two quarters of negative gross domestic product growth.

That compares with only 14 percent in July.

"It's not very often you see such an explicit comment on just a single region, but that's what we've got this time," said Gary Baker, head of European equity strategy at BofA Merrill Lynch Global Research.

"The message coming from (the survey) is that unless you feel more confident about European banks then it's difficult to invest in Europe. The survey shows that sentiment on Europe is now so negative that contagion risk to the rest of the world has risen significantly."

Two-thirds of fund managers in the global survey, which gathered views from 286 panellists with $831 billion (525.6 billion pounds) under management, said the euro zone sovereign debt crisis was the biggest risk.

Two-thirds of investors did not expect a U.S. Federal Reserve rate hike before 2013.

Sixty percent of global fund managers thought the U.S. central bank would step in with further quantitative easing if the U.S. benchmark S&P 500 equity index fell to 1,100 points or below.

The index closed at 1,162.27 points on Monday.

Cash holdings at 4.9 percent remained high, with more than one-third of investors overweight cash.

The growth slowdown has changed investors' view of oil.

"A net 14 percent of respondents view the commodity as overvalued, up from a net zero percent in August," BofA Merrill Lynch said.

The main investment conclusion from the global survey was to short -- a bet on lower prices in the future -- banks.

"Within equities, the story is not one of simple rotation into defensive sectors. Consumer staples, pharmaceuticals and utilities all benefited from the exodus from banks ... so did industrial and technology shares," BofA Merrill Lynch said.

Lack of confidence in equities is reflected in more positive sentiment towards bonds. Global asset allocators more than halved their underweight position in bonds in just two months -- to a net 21 percent now from a net 45 percent in July.

Real estate gained from the disillusionment with equities, while expectations of stronger Chinese growth faded.

A net 30 percent of regional fund managers expect the Chinese economy to weaken over the next 12 months from August's net 11 percent. This was reflected in a sharp decline in asset allocators' enthusiasm for Chinese equities.

"China is still crucial to the equation ... If the economic backdrop were to deteriorate further, emerging market stocks and the commodities complex look the most vulnerable," Baker said. "Up to this point the commodities complex has held up remarkably well."

(Editing by Hugh Lawson)

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