A majority of managers expressed bullishness in eight of the survey’s 13 asset classes. The previous high for a bullish majority was four asset classes. Record highs for bullishness were set in four asset classes—corporate bonds, U.S. small cap value, U.S. mid cap value and high-yield bonds. Value investing also increased in bullish sentiment. Bearishness slightly outweighed bullishness regarding equities in emerging markets and non-U.S. (developed) markets.
Managers see the equities market as oversold, resulting in part by forced selling by leveraged shareholders. With poor liquidity in the bond and cash markets, equities remain the only assets that can easily be sold.
The market, according to managers, seems to have overshot the damage done by the ongoing recession. Seventy-two percent of those surveyed described the market as undervalued—a survey record—compared with 45% last quarter and 34% a year ago. “If the U.S. avoids a calamity,” says Dick Gould, chief investment officer at Gould Investment Partners, “stocks are very cheap.” Managers are also bullish on bonds—corporate and high-yield. While the majority of the managers surveyed believe the market to be undervalued, 20% of the managers declared the market to be “fairly valued.” They cite the risks that define the current economic and financial environment. Seventeen managers (8%) see the market as still “overvalued.” They believe we have not yet established a bottom and forecast a bearish direction well into next year....
The greater appeal of bonds—corporate and high-yield—in this quarter’s survey reflects a major development. Bullishness for corporate bonds reached a historic high of 60%, up from 37% last quarter and a survey low of 4% in the first quarter of 2005. The level of bullishness for high-yieldbonds also rose sharply to 53% from 39% last quarter. This trend suggests that managers see credit spreads as unusually attractive. Again, as with equities, the managers believe that the bond market has overshot the mark and has priced bonds at levels below their likely economic value....
While the managers believe that the market has more than sufficiently discounted the pain in earnings and stock prices caused by the recession, we would advise the reader to be cautious. The bar may be set low and the managers may expect a considerable early bounce, but the volatility of the markets is massive. The managers see equity markets recovering from an oversold position and stock prices ending higher in December 2009, but there is still a great deal of uncertainty.
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