Merrill Lynch Fund Manager Survey Finds Inflation Overtakes Growth as
No. 1 Stagflation Fear.
May 16, 2008
NEW YORK and LONDON, =97 Stagflation fears are gripping investors, but
inflation concerns are fast overtaking worries about economic growth,
according to Merrill Lynch's Survey of Fund Managers for May.
Fund managers were slightly less negative in their expectations for
economic growth and corporate earnings. Particularly striking was that
fewer panellists believe the world has already entered recession =97 18
percent took that view in May, down from 24 percent in April. The
number expecting recession within a year fell to 29 percent from 40
percent. Instead, investors are focusing on inflation. A quarter of
respondents expect global core inflation to rise in the coming 12
months, compared with just 7 percent in April. This is prompting
predictions of higher bonds 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.
"Evidence is pointing to a possible sell-off in bonds as inflation
worries mount," said David Bowers, independent consultant to Merrill
Lynch. "A sharp rise in bond yields could help convert this financial
crisis into an economic crisis."
Investors Unconvinced by Earnings Forecasts
Despite expressing a lower risk of recession, the panel still worries
that earnings estimates are detached from reality. More than three
quarters of investors (77 percent) said, in response to a new
question, that consensus estimates for global corporate earnings are
"too high".
Moreover, fewer investors see value in equities. The number of
investors who believe that equities are undervalued fell to a net 15
percent in May, which is down from a net 26 percent in April. Fears of
overvaluation are also apparent in commodities. In response to new
questions, a net 52 percent of asset allocators said that they thought
oil is overvalued, and a net 29 percent of asset allocators thought
gold to be trading above fundamentals.
Scarcity of Earnings Reignites the Commodities Trade
Fuelled by growing inflation fears, Eurozone investors have
rediscovered their enthusiasm for the commodity trade. Oil & Gas, seen
as inflation-proof, has extended its position as Europe's favourite
sector with 41 percent of investors overweight, compared with 29
percent in April. A net 11 percent of investors expect inflation to
rise in the coming year (2 percent in April). Oil & Gas and Basic
Resources benefit from one of the few clear growth stories.
"In a slowdown, earnings momentum drives out-performance =97 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. "Banks, on the
contrary, are being penalised for "earnings decay". While still
unloved, this month they are no longer seen as cheap as they move from
value-trap, implying upside, to trap status."
One month ago, nearly a quarter of Eurozone and U.K. investors said
banks were undervalued, and that number has now fallen to zero.
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Merrill woos hedge funds with new 'falling shares' target
Analysts at investment bank Merrill Lynch are to extend their coverage
of companies which are set to underperform across the next year, the
Times reports.
Equities specialists at the firm are to increase the number of
companies they cover whose shares are predicted to fall from 12 per
cent of the total to 20 per cent.
This change was contained in a company-wide order - which, it is
thought, will help to attract clients who prefer to "short" the firms
they invest in.
Many hedge funds are attracted to this form of investing, in which a
profit is made if the share value falls below the price at which it
agreed to sell.
Commenting on the move, president of global research at Merrill
Candace Browning said:
"We are introducing a new equity rating system on June 2nd - a
framework explicitly intended to provide clients with enhanced
transparency into analysts' views, greater differentiation among the
equity ratings within a sector and closer alignment between rating
distributions and historical stock performance."
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