Wednesday March 19, 01:50 PM
Stagflation fears push up fund managers' cash levels - Merrill survey UPDATE
(Updating with details on euro zone investors from regional survey)
LONDON (Thomson Financial) - Growing fears of stagflation pushed fund managers' cash levels to a new high and risk appetite close to record lows, though investors
continue to see value in equities, Merrill Lynch (NYSE: MER - news) 's survey of fund managers for March found.
The survey found asset allocators' cash positions rose to a record high for the survey in March with a net 42 pct reporting they are overweight cash, up from February's then high of 41 pct.
Meanwhile, the survey's FMS composite indicator for risk and liquidity stayed at 31, well down on the long-term average of 42.
These findings reflect increased fears of stagflation, with more than three quarters of the survey's panel believing the global economy is entering a year when growth is below trend while inflation is above trend. In February, two thirds had taken that view.
Many more fund managers believe a recession has either begun or will do soon. The net percentage of investors who believe the global economy is already in recession has almost tripled this year, rising to 22 pct in March from just 8 pct in January.
Of particular concern, perhaps, is that fund managers specialising in Asia and emerging markets have highlighted increasing risks to growth in China.
The net percentage of respondents who expect the Chinese economy to weaken has more than doubled this year, to 64 pct in March from 29 pct in January.
At the same time, however, respondents 'reiterated their deep-seated belief' that equities are attractive. A net 25 pct of those surveyed believe equities are undervalued relative to bonds.
This combination does not guarantee a rally, although it has in the past been a prerequisite for a comeback that could catch those positioned for falling markets unaware, Merrill said. To get this, however, it would take a catalyst, one that appears unlikely to materialise for the time being.
'While many raw ingredients for a bear squeeze have come together, what's missing is the catalyst,' said David Bowers, independent consultant to Merrill Lynch.
'With growing fears of both recession and stagflation, it is harder to identify what that catalyst is going to be and when it will appear,' he said.
Meanwhile, Merrill's regional fund mangers' survey revealed euro zone investors are increasingly concerned the European Central Bank's monetary policy risks impeding growth, with over half viewing it as too restrictive.
An overwhelming 87 pct of respondents expect euro zone growth to slow, up from 79 pct in February, while over half expect inflation to rise. These fears of stagflation have left euro zone investors turning to commodity-based stocks, notably in oil and gas where the number claiming to be overweight has quadrupled to 45 pct from 11 pct in February.
'Euro zone fund managers are playing safe by punishing sectors that indulged in the credit binge and seeking refuge elsewhere,' said Karen Olney, chief European equities strategist at Merrill Lynch.
'Fund managers are shifting to the few sectors that could profit form stagflation,' she said.
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