America Is Lone Bright Spot

America Is Lone Bright Spot As Fund Managers Flee Stocks

[ Normxxx Here:  The following is especially ironic, given that Merrill Lynch has put the US financial system on a "death watch" for at least the next 6 months.  ]

By Ambrose Evans-Pritchard, Telegraph.co.UK | 18 July 2008

Fund managers across the world are dumping stocks and retreating to cash in a mood of extreme pessimism, fearing that the looming economic crunch is an even greater threat than inflation. The latest survey of (UK?) investors by Merrill Lynch shows that an unprecedented 41% now think that a world recession is either likely or very likely. The majority dismiss hopes of double-digit earnings growth next year as "fantasy".

"People are a lot more scared about the macro-outlook. The survey has never seen anything like this before since it began a decade ago," said David Bowers, the organiser of the report. "Recession risk has taken over from inflation risk. Fund managers believe the global economy is deteriorating so fast that a wage-spiral is never going to happen, at least in developed markets," he said. The survey is based on 191 funds managing assets worth $610bn (£305bn).

The US is emerging as the one bright spot in the global gloom, despite the credit mayhem. A net 7% of investors are overweight in US equities, clearly betting that most of the bad news is already priced into Wall Street stock prices [[Hah! But reason enough for a "summer rally": normxxx]]. The figure was negative in May [[and June!?!: normxxx]]. With the tailwind of 2% interest rates and a cheap dollar, America stands to benefit from the "first-in, first-out" principle. Others have yet to take their full punishment from the cycle. "The US has now become the country of cheap manufacturing. You've got 20% wage inflation in emerging markets so FDI (foreign direct investment) is flowing back from there," said Karen Olney, Merrill's chief European equity strategist.

The investor love affair with India, China, and Asian markets over the last nine months has turned decidedly sour. "That trade is off," said Mrs Olney. A net 75% are underweight Indian equities as the country's inflation reaches double digits. Chile (-69), Taiwan (-50), Korea (-50), Malaysia (-44) are not far behind. Mr Bowers said investors had woken up to the nasty reality that emerging markets have let rip with inflation and will now have to jam on the brakes.

Those with dollar pegs or dirty floats like China have, in effect, been "destabilised" by the US Federal Reserve's rate cuts. "These countries have used the Fed as their anchor. Rates of 2% have challenged their economic models," he said. Russia (+75) remains the darling of the emerging universe, but for how long? Almost two thirds of investors say oil is fundamentally overvalued. They appear to be hanging on to their oil and gas exposure as a late-cycle "momentum play". A net 42% think the Bank of England has kept interest rates too high given the housing slump and the consumer squeeze. Not a single respondent thinks that the UK is going to get better over the next year. They are ditching bank stocks (-83) and property (-92).

Europe is not faring much better. Some 96% think the economy will get worse over the next year, up sharply from the June survey. A majority believe inflation will fall, and a net 24% say the European Central Bank is engaging in overkill. Not surprisingly, a record 32% are now underweight eurozone equities. Few see stocks as cheap even after the rude sell-off this summer. "Investors think earnings are going into a free-fall," said Mrs Olney. "Healthcare companies offer immunity from the three horrors that are bugging investors: a rising oil price, the slowing economic cycle and the credit crisis."

Japan is sneaking back into favour after years in the wilderness, if only by default. "Japanese banks are the winner from the credit crunch. Japan now has the capacity to be the monopoly supplier of capital to the world once again," said Merrill Lynch.

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Normxxx    
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