Actions belie managers’ optimism, survey shows

Fund managers are becoming increasingly optimistic about improving economic growth and the prospects of inflation, but they remain cautious over U.S. equities and emerging Chinese markets, according to Merrill Lynch’s January global fund managers survey. Thirty-five percent believe long-term interest rates will increase over the next 12 months, up 25 percentage points from December. Those predicting lower inflation dropped to 64% from 82% in December, according to the Merrill Lynch Fund Manager Composite Indicator for Growth Expectations. Despite the optimism, however, the amount managers have in cash dropped modestly to 5.3% from 5.5% in December. “Investors are talking a more positive story, especially with regards to the U.S., but the fear factor remains,” Gary Baker, Banc of America Securities-Merrill Lynch head of EMEA equity strategy, said in a news release. “They have firepower to act, but are unconvinced by the modest recent equity rally, suggesting it is a bear market rally in both sentiment and markets. Global sector allocations remain defensive.” European cash positions remain high, with 42% of regional respondents overweight cash. All respondents cited expectations of a European recession, compared to 91% in December. Fifty-seven percent of European investors are underweight banks and 46% are overweight healthcare. Global investors who are overweight U.S. equities dropped to 7% in January from 25% in December, and investors underweight in global emerging markets fell to 7% from 17%. Investors remain cautious over China, with 70% expecting Chinese growth to slow over the next 12 months, down from 79% in December. “China remains the big global growth wildcard in 2009,” Michael Hartnett, Banc of America Securities-Merrill Lynch chief emerging markets equity strategist, said in the release. “Despite the announcement of huge fiscal stimulus packages in recent months, investors remain very skeptical about Chinese and Asian growth. Indeed, Japanese investors notably reduced their expectations for Japan’s growth to close to a record low.” The survey of 205 global fund managers and 169 regional fund managers was conducted Jan. 9-15.