GLOBAL

   17 May 2005                                 Global
                                               Fund Manager ...
Global Fund Manager Survey – 17 May 2005


                                                                              g...
Global Fund Manager Survey – 17 May 2005




                                                 CONTENTS
                   ...
Global Fund Manager Survey – 17 May 2005



                                             2. Dare to be Different!
        ...
Global Fund Manager Survey – 17 May 2005



                                        3. Profit Expectations
               ...
Global Fund Manager Survey – 17 May 2005



                                                   Table 4: How do You Think t...
Global Fund Manager Survey – 17 May 2005



 Higher volumes as an earnings                  Table 7: What Do You See as th...
Global Fund Manager Survey – 17 May 2005



                                        4. Inflation & Monetary Policy
       ...
Global Fund Manager Survey – 17 May 2005




                                                 Chart 7: Expectations for In...
Global Fund Manager Survey – 17 May 2005




                                                       Table 14: In 12 months...
Global Fund Manager Survey – 17 May 2005



                                        5. Equity Valuation
                  ...
Global Fund Manager Survey – 17 May 2005


                                             Chart 11: Equity Valuation and Net...
Global Fund Manager Survey – 17 May 2005



                                                     6. Measures of Risk
     ...
Global Fund Manager Survey – 17 May 2005



                                        7. Cash Positions
                    ...
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Global Fund Manager Survey

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Global Fund Manager Survey

  1. 1. GLOBAL 17 May 2005 Global Fund Manager Survey From a “Mid-cycle” to “Late-cycle” Mindset Contributors Highlights David Bowers Most negative growth expectations since 2001 Chief Investment Strategist The past two months have seen a dramatic reassessment of both the +44 20 7996 2468 investment strategy and the economic backdrop. The contrast with the views david_bowers@ml.com that were held in early March is truly breathtaking. Investors now think very differently about where we stand in the global business cycle. A majority of the fund managers on our panel (52%) now believe that we have entered the Sarah Franks ‘late-cycle’ phase of the economic cycle. Strategy Analyst +1 212 449 6601 Investors have become a lot gloomier about the prospects for economic sarah_franks@ml.com growth, corporate profits, and margins. The net balance of managers that are positive on growth has gone from plus 11% in March to minus 32% in May, while the prospects for corporate profits have swung from plus 4% in March to minus 34% in May. These two readings are the most negative since 2001. Moreover, the net balance expecting corporate margins to decline has shot up from 18% in March to 40% in May. A fifth of our panel expects zero and/or negative global EPS growth over the coming year. Investors still can’t bring themselves to buy bonds As worries about profit margins have intensified, so anxiety about inflation has diminished. In the past two months, the net balance worried about an acceleration in ‘core’ inflation has fallen from 73% to 45%. This has been accompanied by a significant change in investors’ interest rate expectations. The net balance expecting global short rates to be higher a year from now has fallen from 94% in March to 80% in May. There has been a similar shift in long-rate expectations. Worryingly though, the majority of our panel is still looking for more negatively sloped yield curves a year from now. However, although the macro prospects have deteriorated, and the inflation fears are subsiding, it has not stopped investors from believing that bonds are overvalued. Only 25% of our panel believe bonds are ‘fairly’ or ‘under’ valued – the comparable number for equities is 83% Investors in love with pharma again; less out-of-love with US stocks Investors are less negative on US stocks and less positive on equities in Japan and the eurozone. They have also become more concerned about the euro, which is now seen as the currency most likely to depreciate over the coming year. Global sector rotation shifted predictably against the industrials, the banks and the discretionary names, and to the benefit of pharma, staples and utilities. Pharmaceuticals are now the most loved global sector, while discretionary stocks and banks are now the least liked. Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 34. Global Securities Research & Economics Group RC#40413701 Global Fundamental Equity Research Department
  2. 2. Global Fund Manager Survey – 17 May 2005 global short rates to be higher a year from now has 1. Survey Sound Bites fallen from 94% in March to 80% in May. There has The fieldwork began on Friday 6th May (after the April US been a similar shift in long-rate expectations. non-farm payroll data was released) and closed on Worryingly though, the majority of our panel is still Thursday 12th (before the April US retail sales were looking for more negatively sloped yield curves a year published). from now. Investors are also unchanged in their belief that Fed Funds has to rise to around 3.75% to be Table 1: Markets Between Fieldwork Periods consistent with a neutral policy stance. Fieldwork Dates 5/5-12/5 8/4-14/4 4/3-10/3 4/2-10/2 4. Although the macro prospects have deteriorated, and change from last month: the inflation concerns are subsiding, it has not stopped World Equities (%) -1.3 -3.4 3.2 1.3 investors from believing that bonds are overvalued. Dow Jones (%) -1.2 -4.3 1.6 1.3 Only 25% of our panel believe bonds are ‘fairly’ or US 10-Year (bps) -18 1 35 -20 “under” valued – the comparable number for equities is Commodities (%) -0.8 -3.1 10.6 0.2 83%. History tells us that such a preference for equities Trade Weight Dollar (%) -0.4 2.8 -2.3 2.1 over bonds will only pay off if corporate earnings Source: Datastream surprise positively. We have our doubts. 5. More managers are overweight cash than was the case The past two months have seen a dramatic last month (net balance 23% vs. 17% in May), but the reassessment of investment strategy and the economic average cash balance actual fell slightly to 4.1%. The backdrop as global equities have sold off (down some last time that liquidity was high enough to trigger a 5%). The contrast with the views that were held in liquidity-driven rally in the markets was August 2004, early March is truly breathtaking. Here are some of the when the net balance ‘overweight cash’ stood at 30% main talking points from this month’s survey. and the average cash balance was 4.8%. 1. Investors now think very differently about where we 6. There has been a modest shift in regional preferences. stand in the global business cycle. A majority of the Investors are less negative on US equities, and more fund managers on our panel (52%) now believe that concerned about Japan and the eurozone region. They we have entered the ‘late-cycle’ phase of the global have also become more concerned about the euro, business cycle. There has been a pronounced change which is now seen as the currency that is most likely in perceptions over the past two months (15 ‘degrees’ to depreciate over the coming year. Asset allocators in our business cycle clock), far greater than the regard the euro as the most overvalued currency aggregate change in the preceding six months. When among the majors. you get shifts of this magnitude, you know that ‘macro’ is having a major impact on markets. 7. Investors are starting to reassess their view on China. This month sees a sharp downgrade in investors’ 2. Investors have become a lot gloomier about the perceptions of both the growth and inflation outlook, prospects for economic growth, corporate profits, and although they remain firmly convinced that the margins – certainly compared with two months ago. renminbi is overvalued. Once again, we asked The net balance of managers that are positive on investors what might they do if the renminbi was growth has gone from plus 11% in March to minus revalued 10% against the dollar. The results are 32% in May, while the prospects for corporate profits similar to last month’s poll only more pronounced. have swung from plus 4% in March to minus 34% in They think it will be bad for US treasuries, bad for the May. These two readings are the most negative since dollar, good for the Yen, bad for the euro, and bad for 2001. Moreover, the net balance expecting corporate global liquidity. Interestingly and just like last month, margins to decline has shot up from 18% in March to they remain deeply divided as to whether a revaluation 40% in May. A fifth of our panel expects zero and/or is good or bad for commodity prices. negative global EPS growth over the coming year. 8. Global sector rotation shifted predictably against the 3. As concerns about profit margins have intensified, so industrials, the banks and the discretionary names, and anxiety about inflation has diminished. This is a major to the benefit of pharmaceuticals, staples and utilities. change. A net 20% of our panel believe that the world Pharmaceuticals are now the most loved global sector, is operating below trend. A net 12% believe that while discretionary stocks and banks are now the least commodity prices (as measured by the CRB index) liked. Pharmaceuticals continue to be the sector that will be lower a year from now. In the past two investors continue to see as most undervalued, months, the net balance worried about an acceleration followed by insurance and telecoms. in ‘core’ inflation has fallen from 73% to 45%. This has been accompanied by a significant change in 9. A net 71% of asset allocators think that govt. bonds investors’ interest rate expectations. A net 30% still will outperform corporates over the coming year. That believe monetary policy to be too stimulative (down may reflect perceptions that companies are still under- from 41% in March), but the net balance expecting leveraged and the LBO window is still open. Refer to important disclosures on page 34. 2
  3. 3. Global Fund Manager Survey – 17 May 2005 CONTENTS n Section Page Editorial 1 Key Highlights from the Survey 2 Dare to be Different! 2 Your Checklist – How Consensus Are You? 4 Profit Expectations 3 Economic Cycle Phase and Growth Expectations; Commodity Prices, 5 EPS Estimates; Demands on Cash Flow; Contributors to Earnings Inflation & Monetary Policy 4 Expectations for Inflation; Assessment of Interest Rates; Outlook for 8 Bond Yields; Expectations of Fed Policy; Neutral Fed Policy Equity Valuation 5 Valuation of Global Equities and Bonds; Investing Time Horizons; 11 Small-Caps vs Large-Caps; Risk Appetite Measures of Risk 6 Beta Exposure; Investing Time Horizons; Small-Caps vs Large-Caps; 13 Risk Appetite Cash Positions 7 Overweight / Underweight vs Benchmark and Absolute Cash Positions; 14 Cash by Fund Type; Fund Inflows Regional Preferences 8 Profit Outlook; Earnings Quality; Equity Valuation; Regional Rotation 16 of Five Regions; Most and Least Favorite Currency China 9 Growth and Inflation Outlook for China; Currency Valuation 18 Assessment Sectors 10 Sector Positioning and Valuation; Sector Position and Relative 19 Performance Asset Allocation 11 Equity Weightings; Bond Preferences; Return on Assets; Equity Risk 24 Premium; Asset Positioning; Equity Market Positioning; Currency 12 Currency Valuation, Currency Hedging 29 Demographics 13 The Composition of Our Panel 31 Equity vs Debt Investors 14 Comparing Equity Fund Managers’ and Debt Fund Managers’ 32 Assessment of Bond Valuation and Interest Rate Expectations Refer to important disclosures on page 34. 3
  4. 4. Global Fund Manager Survey – 17 May 2005 2. Dare to be Different! Every month we contact around 300 fund managers from around the world. We ask them what they think about the macro outlook and how they have positioned their investment portfolios. This table summarizes some of their most commonly held views. As you go through the list, you might like to examine how different you are from the consensus by ticking one of the two columns. Table 2: How Different Are You from Consensus? I Agree I Disagree This Month, Fund Managers and Asset Allocators . . . 1 See the global economy as in the late part of the economic cycle o o 2 Think the global economy will weaken over the next year o o 3 See the profit outlook as deteriorating over the next year o o 4 Expect around 5% earnings growth over the next 12 months o o 5 See higher selling prices as the main driver of earnings growth, overtaking higher volumes o o 6 Expect a contraction in operating margins o o 7 Want corporate cash flow to be returned to shareholders rather than used for capex o o 8 Think corporate balance sheets are under-leveraged o o 9 Believe the global economy is operating with a negative output gap o o 10 Think commodity prices will be lower in a year o o 11 Expect core consumer price inflation to be higher a year from now o o 12 Think global monetary policy is too stimulative o o 13 Expect global short-term and long-term interest rates to be higher in 12 months time o o 14 Think yield curves will flatten over the next year o o 15 See a "neutral" Fed rate at 3.7% o o 16 On balance see equities as undervalued o o 17 Think that bond markets are overvalued o o 18 Prefer large-caps to small-caps o o 19 Have shorter-than-normal time horizons o o 20 Have lower-than-normal risk appetites o o 21 Are overweight cash, with just over 4% in portfolios o o 22 Think Emerging Markets have the best profit outlook. o o 23 Think UK equities have the least favorable profit outlook. o o 24 See US equities as having the highest earnings quality, GEM equities the lowest o o 25 See the most value in Eurozone equities o o 26 Think the yen will appreciate the most over the next 12 months o o 27 Think the euro is more likely to depreciate than the US$ o o 28 Would most want to overweight Japan over the next year o o 29 Would most want to underweight US equities o o 30 Expect China’s economy to be weaker in a year’s time, think inflation will be higher o o 31 See the RMB as around 8% undervalued o o 32 Think a RMB revaluation would have an initial negative impact on US treasuries o o 33 Are most overweight the Pharma sector o o 34 Are most underweight Discretionary o o 35 Think Tech is the most overvalued sector, and pharma is the most undervalued o o 36 Do not expect corporate bonds to outperform governments o o 37 Are overweight equities and underweight bonds o o 38 Are most overweight Eurozone equities, are most underweight US equities o o 39 See the EUR and GBP as the most overvalued currencies o o 40 Have the most unhedged currency exposure to GEM currencies o o Refer to important disclosures on page 34. 4
  5. 5. Global Fund Manager Survey – 17 May 2005 3. Profit Expectations Table 3: At This Time, in Which Phase of the Economic Cycle Would You Say the Global Economy is? 52% think the economy is in the % saying: May Apr Mar Feb “late-cycle” phase – the first Early-cycle 2 3 3 3 month more than half of the Mid-cycle 44 51 58 57 panelists expressed this view Late-cycle 52 43 39 37 Recession 0 0 0 0 Where Are We (In Terms of Degrees*) 227 O 217 O 212 O 211 O Don’t know 2 3 0 2 * To track how managers think we are progressing through the economic cycle, we’ve expressed their answer as if positioned on a circle. We have positioned “recession” at 0O, “early cycle” at 90O, “mid-cycle” at 180O and “late cycle” at 270O and calculated an overall position from those four locations. Chart 1: Phases of the Global Economic Cycle, In Degrees* This chart tracks, in Apr May Jun Jul “degrees”, how managers’ Feb Mar Aug Sep Jan-05 assessment of where we are in Oct Nov the economic cycle has M Feb-05 Dec changed over time. When we Mar-05 Apr-05 i asked in February, the answer d was firmly in “early-cycle” May-05 range; it is now into mid- C y cycle. c l Investor opinions as to where e we are in the cycle have moved forward, closer to Early Cycle Late Cycle ‘late-cycle’ range R e c e s s i o n * To track how managers think we are progressing through the economic cycle, we’ve expressed their answer to the question above as if positioned on a circle. We have positioned “recession” at 0O, “early cycle” at 90O, “mid-cycle” at 180O and “late cycle” at 270O and calculated an overall position from those four locations. This chart tracks how managers’ views of where we are in the cycle has changed this year – there’s been a steady climb upward from “early-cycle” to “mid- cycle”. Refer to important disclosures on page 34. 5
  6. 6. Global Fund Manager Survey – 17 May 2005 Table 4: How do You Think the Global Real Economy Will Develop Over the Next 12 Months? Economic expectations % saying: May Apr Mar Feb continue to soften. A net 32% of Get a Lot Stronger 0 2 4 1 investors think that economic Get a Little Stronger 23 29 41 34 Stay the Same 20 18 21 21 growth will be slower over the Get a Little Weaker 53 46 32 43 next twelve months Get a Lot Weaker 3 4 1 2 Net % Expecting Stronger Economy -32 -20 11 -10 DK/Refused 1 1 0 0 Chart 2: Expectations for Economic Growth vs Expectations for Inflation 100 inflation 100 expectations 80 80 60 60 40 40 20 20 0 0 -20 -20 -40 -40 -60 -60 economic expectations -80 -80 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 % Stronger Economy % Higher Inflation Source: DATASTREAM Table 5: Over the Next 12 Months, Do You Think the Outlook for Managers are much more Corporate Profits World-Wide Will … cautious on the profit outlook, a % saying: May Apr Mar Feb net 34% expect it to deteriorate. Improve Strongly 0 2 2 1 Improve Slightly 25 33 41 41 Remain Unchanged 14 12 16 14 Investors have also downgraded Deteriorate Slightly 55 48 38 42 their eps growth assumptions, Deteriorate Strongly 5 4 1 3 from 5.8% to 5.1%. Net % Expecting Corporate Profits to Improve -34 -17 4 -3 DK/Refused 2 2 1 1 Chart 3: Profit Expectations and EPS Forecasts Table 6: What is Your % Forecast 5-12-05 for Global EPS Growth Over the 100 Investors expect around 5.1% eps growth 14 Next 12 Months? 80 12 % saying: May Apr Mar 60 Minus 25% or less 0 0 0 10 40 Minus 20% 0 1 0 Minus 15% 1 0 1 20 8 Minus 10% 4 3 1 0 6 Minus 5% 7 6 4 Zero 7 3 5 -20 4 Plus 5% 39 36 32 -40 Plus 10% 34 38 47 2 Plus 15% 2 4 4 -60 Plus 20% 0 0 1 -80 0 Plus 25% or more 0 0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Net % Expecting Profit Outlook to Improve Average EPS % 5.1 5.8 6.9 12-mth eps growth est %(R.H.SCALE) Source: DATASTREAM DK / Refused 6 8 4 Refer to important disclosures on page 34. 6
  7. 7. Global Fund Manager Survey – 17 May 2005 Higher volumes as an earnings Table 7: What Do You See as the Most Positive Contributor to Global driver falls sharply – now Corporate Earnings Over the Next Twelve Months? overtaken by higher selling % saying: May Apr Mar Feb prices (though lower costs also Higher Volumes 29 40 50 44 Higher Selling Prices 39 33 30 29 on the rise!) Lower Costs 27 21 16 23 DK/Refused 5 6 4 5 Chart 4: What’s the Most Positive Contributor to Earnings Over the Next Twelve Months? A net 40% of investors anticipate margin contraction 80 over the next 12 months 70 higher v olume s 60 50 Table 8: Over the next 12 months, do you think corporate 40 higher se lling p rices operating margins will… 30 % saying May Apr Mar 20 Increase 14 18 22 Decrease 54 49 40 10 Stay the same 31 30 36 low e r costs 0 Net % Say Improve -40 -30 -18 Sep-02 Sep-03 Sep-04 Jul-02 Jul-03 Jul-04 Jan-03 Mar-03 Jan-04 Mar-04 Jan-05 Mar-05 May-02 Nov-02 May-03 Nov-03 May-04 Nov-04 May-05 DK/Refused 2 3 2 Table 9: What Would You Most Like to See Companies Doing With Cash 49% of the panel want Flow at the Current Time? corporate cash returned to % saying: May Apr Mar Feb shareholders Increase capital spending 30 36 36 33 Improve balance sheets (e.g. repay debt, top up company pension plan) 17 14 14 14 Return cash to shareholders (increased share buybacks / dividends) 49 44 47 49 Don’t Know / Refused / Other 5 5 3 4 A net 35% of investors think Chart 5: What Would You Most Like to See Companies Doing With Cash Flow? corporate balance sheets are 60 return cash to shareholders under-leveraged 50 increase capex Generally speaking, do you think 40 that corporate balance sheets are currently… 30 % saying: May Apr 20 Over-leveraged 6 6 Under-leveraged 41 44 10 Appropriately Leveraged 47 44 Net % Say Under- 0 rebuild balance sheets Leveraged 35 38 Aug-02 Oct-02 Dec-02 Apr-03 Aug-03 Oct-03 Dec-03 Apr-04 Aug-04 Oct-04 Dec-04 Apr-05 Jun-02 Jun-03 Jun-04 Feb-03 Feb-04 Feb-05 DK/Refused 6 7 Refer to important disclosures on page 34. 7
  8. 8. Global Fund Manager Survey – 17 May 2005 4. Inflation & Monetary Policy Table 10: At This Time, Do You Think the Global Economy is Operating … % saying May Apr Mar Feb With a positive output gap (i.e. output above its long- term sustainable growth path) 22 26 21 24 On balance, investors With a negative output gap (i.e. output below its long- believe the global economy term sustainable growth path) 42 37 43 38 to be operating below trend With a zero output gap (i.e. output in line with its long- term sustainable growth path) 31 31 29 32 % See Positive Output Gap - % See Negative -20 -10 -22 -15 Don’t know 5 6 7 6 Chart 6: Net % See a Positive (Negative) Output Gap 0 -5 -10 -15 -20 -25 N et % S ee a P os itiv e O utput G ap -30 A ug-04 S ep-04 O c t-04 N ov -04 Dec -04 J an-05 F eb-05 M ar-05 A pr-05 M ay -05 Table 11: In 12 months' time, do you think that commodity prices (as tracked by the CRB index) will be…? % saying May Apr A net 12% of investors think A Lot Higher (+15% or more) 0 2 commodity prices will be lower Moderately Higher (+5-15%) 29 31 Broadly Unchanged (between +/- 5%) 28 29 in a year’s time, on average by Moderately Lower (-5-15%) 36 28 around 1% A Lot Lower (-15% or less) 5 7 Net % Expect Commodity Prices to be Higher -12 -3 Average % Expected Change in CRB Index -1 -1 Don’t know 2 3 Refer to important disclosures on page 34. 8
  9. 9. Global Fund Manager Survey – 17 May 2005 Chart 7: Expectations for Inflation and Assessment of Interest Rates Table 12: Inflation & Monetary 100 100 Policy Inflation expectations % saying: May Apr Mar decline 80 80 In 12m, A Lot Higher 2 3 4 Will Slightly Higher 59 67 74 Global 60 60 Unchanged 22 21 15 Core Inflation Slightly Lower 16 8 5 40 40 Be... A Lot Lower 0 0 0 Net % Saying Higher 45 62 73 20 20 Do You Too Think Stimulative 34 41 43 0 0 Global About Right 61 55 53 Monetary Too Policy is... Restrictive 3 1 2 -20 -20 Net % Saying Too Stimulative 30 39 41 -40 monetary policy -40 seen as stimulative -60 -60 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Net % Expecting Higher Inflation Net % Saying Global Monetary Policy Too Stimulative Source: DATASTREAM Chart 8: Outlook for Rates Table 13: Outlook for Rates 63% expect long rates 5-12-05 100 100 % saying: May Apr Mar to rise In 12 A Lot Higher 6 14 15 80 80 Months, Slightly Higher 79 78 80 Will Short- Unchanged 10 5 4 60 60 Term Interest Slightly Lower 4 2 0 40 40 Rates Be... A Lot Lower 0 0 0 Net % Saying Higher 80 90 94 20 20 In 12 A Lot Higher 9 10 16 Months, Slightly Higher 62 67 67 0 0 Will Long- Unchanged 18 16 14 Term Slightly Lower 7 6 4 -20 -20 Interest A Lot Lower Rates Be... 2 1 0 -40 80% think short rates -40 Net % Expect Higher 63 69 79 will be higher in a year -60 -60 -80 -80 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Net % Expecting Short-Term Rates to be Higher in 12 Months Net % Expecting Long-Term Rates to be Higher in 12 Months Source: DATASTREAM Refer to important disclosures on page 34. 9
  10. 10. Global Fund Manager Survey – 17 May 2005 Table 14: In 12 months’ time, do you think yield curves (i.e. 10-year minus 3-month rates) will… % saying May Apr Mar Feb A net 31% of investors think Flatten (become more negatively sloped) 54 57 52 66 yield curves will flatten over the Steepen (become more positively sloped) 23 24 29 20 next year Remain the same 19 14 16 11 Net % Expect Flatter Yield Curves 31 33 23 46 DK/Refused 4 6 4 3 Chart 9: At this time, what do you consider to be a neutral Fed Funds rate (i.e. one that is neither stimulative nor restrictive)? What’s a “Neutral” Fed Funds Rate? 4.0 Equity Fund Debt Fund Equity FM Debt FM % saying: Managers Managers* 2% or lower 1 1 3.8 2.25% 0 0 Both equity and debt investors see a “neutral” 2.5% 1 0 rate around 3.7-3.8% 2.75% 0 0 3.5 3.0% 7 3 3.25% 9 5 3.3 3.5% 28 27 3.75% 12 17 4.0% 22 29 3.0 4.25% 3 6 4.5% 7 8 4.75% or higher 5 2 2.8 Oct-04 Apr-05 Aug-04 Sep-04 Dec-04 Jun-04 Jul-04 Jan-05 Mar-05 Feb-05 Nov-04 May-05 “Neutral” Fed Rate 3.7 3.8 * Results from the ML FX and Debt Survey Refer to important disclosures on page 34. 10
  11. 11. Global Fund Manager Survey – 17 May 2005 5. Equity Valuation Table 15: Do You Think Global Equity Markets are Currently . . . % saying: May Apr Mar Feb On balance, a net 15% think Overvalued 15 14 12 10 global equities are Fairly Valued 54 63 66 62 undervalued Undervalued 29 20 22 27 Net % Saying “Overvalued” -15 -6 -10 -17 DK/Refused 2 3 1 1 Table 16: Do You Think Global Bond Markets are Currently . . . 68% think bonds are % saying: May Apr Mar Feb overvalued Overvalued 71 70 76 74 (to see what fixed income Fairly Valued 22 20 16 20 Undervalued 3 4 3 3 managers think see the last Net % Say Overvalued 68 67 73 71 pages) DK/Refused 5 6 4 3 Chart 10: Equity Valuation vs Bond Market Valuation 5-12-05 75 75 Bonds seen as overvalued 60 60 40 40 20 20 0 0 -20 -20 Stocks seen as undervalued -40 -40 -50 -50 1998 1999 2000 2001 2002 2003 2004 2005 2006 Net % Think Global Equities are Overvalued Net % Think Bonds are Overvalued Source: DATASTREAM Refer to important disclosures on page 34. 11
  12. 12. Global Fund Manager Survey – 17 May 2005 Chart 11: Equity Valuation and Net % of Managers Overweight Cash 10 Mar-04 Jan-02 5 Feb-04 Apr-02 Apr-04 May -02 Cash on hand and an 0 Sep-03 Dec-03 Nov -03 -5 Jan-04 0 5 10 15 20 25 30 35 40 45 undervalued market (points in -5 Jul-03 the lower right corner of the -10 chart) can be a powerful <- Undervalued // Overvalued -> -15 May -05 combination -20 May -03 On this chart we’ve marked -25 Sep-01 where the +/-1 standard -30 Jul-02 Apr-01 Oct-01 deviation bands lie, showing Aug-02 Oct-02 -35 “extremes” in the cash & value Feb-03 Mar-03 combination -40 -45 <- Underweight Cash // Overweight Cash -> Table 17: In the Current Environment, Do You Prefer Large-Cap or Small Cap Stocks? % saying: May Apr Mar Feb Large-Cap 69 64 60 55 Large-caps preferred to small- Small-Cap 9 8 9 13 caps No Preference 16 23 26 26 Net Preferring Small Caps -60 -55 -52 -43 DK/Refused 6 5 4 6 Chart 12: Net % Preferring Small Caps and Relative Performance 5-12-05 10 0.16 0 0.15 0.14 -10 -20 0.13 -30 0.12 -40 0.11 -50 0.10 -60 -70 0.09 2001 2002 2003 2004 2005 NET % PREFERRING SMALL CAPS OVER LARGE CAPS SMALL CAPS REL TO WORLD(R.H.SCALE) Source: DATASTREAM Refer to important disclosures on page 34. 12
  13. 13. Global Fund Manager Survey – 17 May 2005 6. Measures of Risk Chart 13: Risk Appetite & Investing Time Horizons 20 Net % Longer Time Horizons Table 18: Risk Appetite & Net % Higher Risk Investing Time Horizons 10 % saying: May Apr Mar longer time horizons . . . higher risk appetite How would you describe your current investment time horizon? 0 shorter time horizons . . . Longer than normal 9 6 4 lower risk appetite Normal 62 67 65 -10 Shorter than normal 24 21 27 Net % Say Longer -20 Than Normal -16 -15 -23 DK/Refused 5 5 4 -30 What level of risk are you currently taking in your investment strategy / portfolio, relative to your benchmark? -40 Higher than normal 10 12 15 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Aug-01 Dec-01 Aug-02 Dec-02 Aug-03 Dec-03 Aug-04 Dec-04 Jun-01 Feb-02 Jun-02 Feb-03 Jun-03 Feb-04 Jun-04 Feb-05 Normal 51 51 59 Lower than normal 34 34 22 Net % Say Higher Than Normal -23 -21 -7 Chart 14: Investing Time Horizons and Risk Appetite DK/Refused 6 4 4 +1 st dev (time) +1 st dev (risk) A net 23% of our panel have a <<low<< RISK APPETITE >>high>> lower-than-normal risk appetite, a net 16% have a shorter-than- normal investing time horizon -1 st dev (risk) May 2005 -1 st dev (time) The shaded boxes represent ‘extremes’ in risk taking (upper right) or risk aversion (lower left). While investors currently have low risk appetite, their time horizons are not extreme <<short<< TIME HORIZONS >>long>> Refer to important disclosures on page 34. 13
  14. 14. Global Fund Manager Survey – 17 May 2005 7. Cash Positions Table 19: Are You Currently Overweight, Underweight or Neutral Cash Relative to Your Benchmark? A net 23% of the panel are % saying: May Apr Mar Feb overweight cash Overweight 34 29 28 26 Neutral 41 42 42 38 Underweight 11 12 16 20 Net Balance Overweight 23 17 12 6 Not Applicable/DK 14 16 14 16 Table 20: Which of the Following Comes Closest to Your Current Cash Position? % saying: May Apr Mar Feb Average cash in portfolios is 0% 15 18 20 18 around 4.1% - broadly 2% 26 23 24 28 unchanged from last month 4% 22 20 18 21 6% 7 10 10 10 8% 4 3 4 3 10% 4 4 5 3 12% or more 9 10 11 8 Mean Cash Balance (%) 4.1 4.2 4.2 3.9 Not Applicable/DK 14 13 8 9 Chart 15: Net Overweight Cash and Mean Cash Balance 50 11 More investors say they’re overweight cash (though 40 % balances are broadly unchanged) 10 30 9 20 8 10 0 7 -10 6 -20 5 -30 4 -40 -50 3 1998 1999 2000 2001 2002 2003 2004 2005 2006 Net % Overweight Cash Average Cash Balance %(R.H.SCALE) Source: DATASTREAM Refer to important disclosures on page 34. 14

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