Wednesday May 14, 01:49 PM
Inflation overtaking growth as fund managers' main fear - Merrill survey
LONDON (Thomson Financial) - Inflation concerns are fast overtaking worries over slowing economic growth, according to Merrill Lynch (NYSE: MER - news)
's latest survey of global fund managers.
A quarter of respondents in May's survey said they expect global core inflation to rise in the coming 12 months, compared with just 7 percent in April.
'The fear of recession has begun to lift slightly. But what has taken its place is a growing concern about above-trend inflation,' said David Bowers, independent consultant to Merrill Lynch.
The survey found fund managers were slightly less negative on their expectations for economic growth and corporate earnings. In particular, fewer panellists now believe the world has already entered recession, with 18 percent taking that view in May, down from 24 percent in April. The number expecting a recession within a year has also fallen to 29 percent from 40 percent.
This does not mean, however, that the economic woes have gone away.
'The picture is still far from settled. There is growing concern that we are in a stagflation environment,' he said.
Meanwhile, mounting concerns over inflation are prompting predictions of higher bond yields, with 80 percent of investors expecting long-term rates to be higher a year from now. In contrast, fewer respondents are predicting higher short-term rates, the survey showed.
'Evidence is pointing to a possible sell-off in bonds as inflation worries mount,' Bowers said.
Neither, however, do investors see much value in equities. The number of panellists who believe equities are undervalued has fallen to a net 15 percent in May from a net 26 percent in April.
The reason for this is partly reflected in views on the outlook for corporate earnings, with more than three quarters of investors saying that consensus estimates for global corporate earnings are too high.
Elsewhere, the breakdown of the regional survey revealed that the current difficult investment environment has led to a very polarised sector view.
Seen as inflation-proof, the oil and gas sector has extended its position as Europe's favourite sector, with 41 percent of respondents overweight, up from 29 percent in April, while basic resources are also popular as investors search for earnings momentum.
'In a slowdown, earnings momentum drives outperformance -- not value. The relentless need for food and infrastructure in developing markets means that commodities, and not labour, are the scarce resources in this cycle, and this scarcity means pricing power,' said Karen Olney, chief European equities strategist at Merrill Lynch.
The only other sectors that emerged as overweight this month were insurance, telecoms and pharma.
Notably banks are no longer seen as cheap, as concerns over upcoming rights issues compound worries over their earnings outlook. A net 31 percent of European investors polled said they were underweight on banks in May, up from 21 percent in April.
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