Aieee! Fund Managers' Gloomy Outlook

Institutional investors most cautious since 2001, Merrill survey shows.


Fearful of further market slides, institutional investors have turned more risk-averse than they have been in past seven years, according to a Merrill Lynch survey. About 30 percent of the 190 fund managers surveyed said they've hedged against further stock sell-offs over the next three months, and 40 percent say they're taking a lower level of risk than normal.

Other highlights of the survey:

• Of managers surveyed, 41 percent are overweight cash, the highest since the aftermath of the September 11 terrorist attacks. Cash levels are at an average of 4.7 percent, up from 3.9 percent in January.

• Roughly two thirds of managers expect deterioration in the outlook for corporate profits over the next 12 months, up from 57 percent in January.

• A quarter of respondents think stocks are undervalued, up from 5 percent in November, and 48 percent currently view bonds as overvalued.

• Nearly 30 percent of managers think a global recession is likely in the next 12 months, up from 19 percent in January.

Why is this good news? Because the Merrill survey is a "contrarian investors' bible," says Brett Arends of the Wall Street Journal.

Speaking of Merrill Lynch, Citigroup analyst Prashant Bhatia thinks the investment bank (symbol MER) can double its earnings power over the next few years. In a note to clients today, Bhatia says Merrill could earn between $10 billion and $12 billion by "capitalizing on several billion-dollar revenue opportunities in each of its major businesses." The company's wealth-management unit could add $6 billion in revenue over the next five years, writes Bhatia, with a third of that growth coming from foreign operations. Currently, that unit has only $165 billion of client assets overseas, where the potential market is $26 trillion. Merrill's stock is trading close to $51 today; Bhatia's target price is $75.