VIEW-Merrill cautious on 2009

LONDON (Reuters) - There is little prospect of an improvement in markets in 2009, but European equities could benefit from an increase in government spending, a senior investment manager said on Thursday.

In his annual outlook, Gary Dugan, chief investment officer of Merrill Lynch Global Wealth Management for EMEA, said the markets could get a positive surprise as Europe plays catch-up on stimulus measures.

"European government support is so far a fraction of what's been done elsewhere in the world. They are only just waking up to the fact that they need to do a great deal more, and they need to do it quickly," he said.

Dugan added that he did not see enough value in the U.S., with P/E ratios at 12 to 14 as opposed to 6 to 7 in Europe.

"The dividend yield support is also half that of Europe," he added.

Dugan acknowledged that his favouring of Europe over the United States was against the consensus. He also bucks the trend over the general outlook for assets outside government bonds.

"Too many people are saying that H2 will be better and things will be back to normal by 2010, but we have to overcome some big structural imbalances," he said.

"Until we see a bigger policy response we won't guide clients into taking more risk. The 40 to 50 percent upside that some people are talking about is pie in the sky."

DIVIDENDS DIVE?