Dresdner Advises Aggressive `Underweight' in Stocks (Update8)

By Alexis Xydias

March 2 (Bloomberg) -- Investors should reduce stock holdings and buy government bonds because the current market sell-off is not over, said Dresdner Kleinwort, the top-ranked strategists in the world.

``The long and widely awaited equity correction is upon us,'' wrote London-based Albert Edwards, a strategist at Dresdner, in a note today. ``We are shifting our asset allocation stance to become much more aggressively underweight equities.''

More than $1.5 trillion in market value has been wiped off global indexes since a slump in Chinese shares on Feb. 27, the biggest in a decade, spooked investors. Morgan Stanley Capital International's All-Countries World Index has lost 4.4 percent in four sessions and was down 0.3 percent today as of 5 p.m. in London.

The strategist predicted ``an imminent shakeout of at least 10 percent'' in equities, according to the note. Dresdner has had a ``structural underweight'' in stocks since October 1996 relative to bonds in an asset allocation model. An ``underweight'' position means investors should hold fewer of the securities than are represented in benchmarks.

``Timing has never been our strongpoint,'' Edwards wrote. ``But we believe `the great unwind' has now started.''

The biggest concern is a deteriorating U.S. economy, and the latest signs are declines in durable-goods orders and new- home sales, Edwards said in an interview.

``If the housing market hasn't bottomed yet, there's a real recession risk,'' he said.

Dresdner's bearish stance comes as banks, including UBS AG and Merrill, Lynch & Co., advised investors not to flee stocks, saying the slump is temporary and will be followed by rebounds.

`Looking at Opportunities'

``We are probably more than half way through this correction and people should start looking at opportunities,'' said Nick Nelson, equity strategist at UBS. ``I don't think the macro fundamentals have deteriorated much. It's going to be less of a correction than it was in May.''

A four-year rally in equity markets was interrupted last year by a sell-off in May and June that prompted the MSCI AC World Index, a global benchmark for developed and emerging countries, to drop as much as 13 percent.

The slump at that time was triggered by concern that the U.S. would continue with its series of interest-rate increases. The Federal Reserve last raised borrowing costs in June.

Dresdner, the investment banking arm of Dresdner Bank AG, was voted the top global equity strategy team in Thomson Extel's annual surveys in the past three years. Edwards and his colleague James Montier were also voted the two best individual strategists since at least 2004.

Stock, Bond Gains

The MSCI World Index, a measure for developed markets, has rallied 87 percent since October 1996, while a gauge for government bonds in the U.S. compiled by JPMorgan Chase & Co. has advanced 85 percent in the period.

U.S. 10-year Treasuries this week headed for their biggest advance in five months, while benchmark European bonds gained the most in almost two years.

Investors should cut allocations for stocks to 35 percent of their holdings, down from 45 percent previously, and increase bonds to 50 percent, from 45 percent, according to Dresdner. The amount for cash should rise to 15 percent, up from 10 percent.

Dresdner's neutral asset-allocation model calls for 60 percent equities, 35 percent bonds and 5 percent cash.