Investors Bearish on Oil, Emerging Markets, Bullish on Banks

“Oil's decline has been a catalyst for a lot of changes in the market,'' said David Bowers, consultant to Merrill, at a presentation in London.  “It spells bad news for global emerging markets and investors are starting to turn away.''  Investors became more positive on banks as they increased bets that interest rates will fall within a year.

One percent of investors this month said they were underweight on energy shares.  The last time the survey resulted in an underweight position on energy was in early 2002, Merrill said.  Last month, investors had a 24 percent overweight position in the shares.  In emerging markets, investors who were underweight outnumbered those overweight for the first time since 2001, the survey showed.  Twenty-one percent of investors said they were overweight banks, an industry that benefits from lower interest rates as cheaper borrowing spurs demand for loans. That is up from 15 percent last month. Banks were the second-favorite industry behind pharmaceuticals this month, replacing energy shares.

Crude oil's drop has changed investors' perceptions about the outlook for inflation, Bowers said.  Respondents predicting lower inflation and a decline in interest rates outnumbered those expecting increases for the first time this year.  Forty-one percent said rates worldwide will be lower, up from 36 percent in September. Forty-four percent said core inflation will drop, up from 38 percent.

Fifty-five percent of investors said they had overweight holdings in stocks, down from 59 percent in September. The position on bonds was unchanged, with 10 percent overweight.  Companies in the euro region have the best earnings outlook and the lowest stock prices relative to profits, according to the survey respondents.  Fifty-two percent said they had overweight holdings in the euro region, up from 49 percent in September.  Global emerging markets tied with the U.K. as the least preferred region. In the U.S, underweight investors outnumbered the overweight by a net 11 percent.