Tuesday, July 21, 2009

Citi Surveying The Investment Landscape

Complementary to the posting of key conclusions by Merrill Lynch(ed), here is the summary of survey findings by Citigroup (U.S. focused survey), published last Friday:
July survey responses show growing investor optimism. In the latest survey responses from institutional clients, we can discern more confidence building amongst investors. Specifically, an overwhelming 92% of those polled believe the market bottom already has been experienced, with more than 85% expecting the S&P 500 to close above 900 by year-end 2009 and more than 70% forecast a close above 1,000 by year-end 2010. Yet, we wonder about their conviction given our Panic/Euphoria Model’s readings.

Tech remains the sector favorite while Utilities remain the least liked. While there
is growing interest in Energy, Materials and Industrials, investors strongly favor the IT and Financials sectors. Moreover, traditionally defensive sectors including Health Care, Consumer Staples and Utilities are expected to underperform in both 2009 and 2010, consistent with a more bullish stance. Historically, such data was used as a contrarian signal, but recent survey results have been a good indicator of direct performance relationships, not indirect ones.

The poll respondents are looking to allocate more cash to equities. A full 60% claim to
be willing to allocate more money to equities by year-end 2009 even as only about 28% say they are overweight bonds vs. more than 60% being overweight stocks. With average cash levels as a percent of assets under management reaching 16% (vs. a median of 6%), there appears to be ample firepower for fund managers to increase
their equity market exposure, with many favoring emerging markets over US stocks.

Clients expect S&P 500 EPS to decline by more than 9% in 2009 but rebound
10%+ in 2010. Institutional investors expect 2009 earnings to drop year over year by an average 9.3% (and a median 12.0%) and then bounce back in 2010 by 13% (and a median of 15%). Thus, buy-siders appear to be less negative than the sell-side consensus of a 15% drop this year and less confident than the sell side forecast for a better than 20% recovery next year. However, the buy side is more optimistic than Citi’s earnings forecasts for both years.

Investors also weigh in on Fed policy, unemployment, style winners and likely
legislation. While portfolio managers expect the Fed to begin lifting short-term rates around mid-year 2010, unemployment could rise to 10%-11% in the eyes of many investors, with value expected to outperform in 2009 and growth to outperform in 2010. Interestingly, clients envision passage of some Health Care legislation this year but are less convinced that the Climate Change bill will be signed into law, which seems consistent with what our DC sources were suggesting six weeks ago during a visit to Capitol Hill.
This sentence feels somewhat uncomfortable to me: "However, the buy side is more optimistic than Citi’s earnings forecasts..."

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