Many now wonder whether monetary policy has become too stimulative
Business Times - 20 Jun 2008
By LYNETTE KHOO
(SINGAPORE) Fund managers' view of global equities has nosedived to a decade low as fears of stagflation heighten, according to the latest Merrill Lynch Survey of Fund Managers.
The June survey shows that the net balance of fund managers who 'underweight' equities rose from 5 per cent in May to 27 per cent in June - the most negative stance that the survey has recorded in 10 years.
Only one per cent of the respondents believe equities are undervalued, down from 25 per cent in March. A net 42 per cent are 'overweight' cash, up from a net 31 per cent in May.
Merrill Lynch noted that investors have reacted to the stagflation fears by reducing their exposure to both equities and bonds and moving into cash, raising their cash positions back to the levels last seen in March.
'The prospect of stagflation is beginning to create a major headwind for equities,' said Karen Olney, chief European equities strategist at Merrill Lynch.
The net balance of fund managers expecting higher core inflation a year from now rose to 33 per cent this month from 25 per cent in May.
A significant number of fund managers now wonder whether monetary policy has become too stimulative. Merrill Lynch noted that it is the first time in 10 months that it is seeing managers expecting short- term interest rates to be higher a year from now.
'The market is waking up to the idea that global interest rates are too low; in fact, they remain below inflation,' Ms Olney said. 'Merrill Lynch expects a double rate hike from the European Central Bank (ECB) by October and would expect other central banks to follow.'
The Eurozone has borne the brunt of investors' shift away from equities into cash and has moved from the most favoured to least favoured over the past 12 months. Investors continue to 'overweight' the US, Japan and the global emerging markets (GEM).
Within GEM, fund managers are most bullish on Russia and Brazil while in the Asia-Pacific ex-Japan region, Taiwan, Hong Kong and Singapore received the most 'overweight' calls.
The Merrill Lynch global survey polled 204 fund managers managing a total of US$718 billion. Some 185 fund managers participated in the regional surveys.
While the credit crunch is losing its sting, inflation has replaced it as the greatest single threat to financial market stability, the survey shows.
The number of investors citing 'credit risk' as the No 1 threat fell from a net 95 per cent three months ago to 81 per cent in June but those who cite 'monetary risk' as the greatest threat rose from a net 23 per cent in May to net 65 per cent this month.
'The inflation shock has already happened,' said Alex Patelis, head of international economics at Merrill Lynch. 'What matters now is how persistent it is and how markets and policymakers react. At a global level, this begs for an accident that will awaken markets and policymakers to the risks.'
But worsening corporate earnings growth may tie the governments' hands in coping with inflation. A net 81 per cent of the panel believe consensus earnings estimates for the next 12 months are too high and a net 77 per cent expect corporate margins to decline.
Given the headwinds in global growth and equities, the risk appetite among fund managers has fallen in June, with the net balance of managers taking a lower-than-normal level of risk in their portfolios falling to an all-time low of 43 per cent. They are, however, increasingly positive about alternative investments.