The US investment house regularly polls institutional investors for their views on the stock market.
The latest survey, published yesterday, said: "Fund managers are looking to raise their exposure to UK gilts and reduce their exposure to UK equities." It said buyers of Government stocks outnumbered sellers by 29 per cent - the largest majority since December, 1994.
Managers were switching to Government stocks, it concluded, because they were pessimistic about interest rates and few expected economic activity to strengthen. The abolition of tax credits was another inhibiting influence.
Merrill Lynch's Bijal Shah said the survey "indicated some nervousness among professional investors" but they could be buying "despite their misgivings".
The securities house's current year-end Footsie forecast is 5,000 points.
Although Merrill Lynch had the misfortune to publish a bearish survey when the stock market was in rampant form, it called pharmaceuticals correctly. Drugs were favoured by fund managers and they were in the forefront of yesterday's surge, which occurred against the backdrop of unexceptional trading levels.
US influences were mainly behind the outbreak of drug enthusiasm. The British drugs contingent has yet to enjoy the sort of ratings which most of their transatlantic counterparts are accorded and the US interest was said to reflect New York's search for cheap stock.
A buy circular from NatWest Securities was another factor and, just to keep the pot boiling, Roche, the big Swiss group which has been linked with almost every drug company of note, is due to disclose sales figures this week. Such is the fever of expectation in the industry that any statement from Roche, no matter how mundane, is regarded as having the potential to create excitement.
So Glaxo Wellcome jumped 59.5p to 1,376.5p; Zeneca, where takeover hopes still linger, 78.5p to 2,158.5p and SmithKline Beecham 43p to 1,247p. Even British Biotech joined the advance, up 12.5p to 167p.
Imperial Chemical Industries led the blue-chip charge with a 69.5p gain to 880p as the $3bn bulk chemicals sale to El DePont de Nemours, the US giant, captivated the market with talk ICI could hit 1,000p.
The group, which has sadly underperformed in recent years, is attracting growing US support and its ADRs touched a 12-month high in New York.
Once again it was a case of two markets - the blue chips and the rest. Much of the investment activity was concentrated among the leaders with the second and third liners largely neglected. Indeed, the FTSE SmallCap index managed a 1 point gain to 2,205.4.
BT, after Friday's shock profit warning from its intended US partner, MCI, had another busy line session with the shares gaining 16p to 456.5p. Desperate attempts by arbitrageurs to close their positions was largely responsible for the partial recovery.
Storehouse firmed to 212p. BZW, the investment house which has been a long time bear, has taken the shares off its sell list. In the past year Storehouse has fallen from 319p to 185.5p shortly before last week's moderately better-than-expected trading update.
Another far from buoyant retailer, WH Smith, put on 9p to 350.5p, partly on takeover hopes with Tesco regarded as the most likely bidder. Tesco and the other superstores which had strong runs last week eased on profit taking.
Some of the hard pressed exporters perked up. Wolseley, the building materials distributor, hardened 23p to 456.5p and Cookson, the industrial materials group, put on 8p to 194.5p. David S Smith, the paper and packaging group, rose 15p from its 12-month low to 184.5p as a hovering line was cleared. Year's results are due tomorrow with around pounds 90m (against pounds 125m) expected.
Rolls-Royce, however, dived a further 8.5p to 216p, equalling their year's low, and Thorn found yet another resting place following its demeger from EMI, falling 18.5p to 158.5p following a profits warning.
Manchester Utd firmed to 651p after chief executive Martin Edwards sold 405,000 shares at 560p.
Barr & Wallace Arnold bounded a further 26p to 316.5p on the planned sale of its leisure division and DBS Management, the financial group, lost 67.5p to 1,077.5p as the Personal Investment Authority confirmed it had started disciplinary action.Reuse content