Time To Cautiously Move Back Into Stocks, Says Merrill Lynch

Rachel Walsh

5 November 2008

Now is the time to buy and “be greedy when others are fearful”, wrote Warren Buffett in the New York Times last month. Easy for him to say, though Gary Dugan, the chief investment officer of Merrill Lynch Global Wealth Management, agrees this is a buying moment. But, he adds, your risks need not be high to reap good returns.

"All markets - high risk and low risk - have had massive falls, and investors need only take modest risk to make double digit returns” said Mr Dugan in his View on the Week note.

"Good quality blue-chip stocks will easily return 10 per cent or more over the next year. European shares have fallen 17 per cent since the end of September, and are currently yielding around six per cent. Combine this dividend yield with improved capital performance - a market move back to where we were a month or so ago - and it gives a significant total return.”

Mr Dugan says “defensive stocks”, such as pharmaceuticals and high, safe, dividend paying stocks are good, relatively low-risk investments.

Merrill Lynch still advises caution with emerging market equities and bonds, despite liquidity boosts from the US Federal Reserve and the IMF. Mr Dugan says these boosts have mostly gone to countries with basically sound economies that may not even avail of them.

The bank is optimistic that small improvements indicate things are slowly returning to normal. Last week the VIX index, a measure of the volatility of the US equity market, fell back from recent highs to 48, although above its 52-week low of 16. Mr Dugan called the drop “a step in the right direction”.

Bond market issuance also improved last week, the bank notes. Total new issuance in Europe rose to €6.6 billion and $6.3 billion in the US. Both were an improvement on the week before. Merrill Lynch favours high grade bonds over high yield for any new investment.

“We maintain that there is value in the markets”, Mr Dugan says, “but are just warning investors to be careful about the day they choose to buy. Patience is needed to invest on market dips.”

Merrill Lynch Global Wealth Management consists of two business divisions - Global Private Client and Global Investment Management. Merrill Lynch’s Global Private Client group provides advice-based wealth management services and products to individual clients and businesses.

Merrill Lynch's Global Investment Management group includes interests in businesses that create and manage wealth management products for individual investors and small businesses.