Inflation Fears Reverse for Fund Managers

The August Merrill Lynch survey of fund managers says inflation fears have all but evaporated.

Prompted by falling oil prices and the mounting substantiations of a recession, Merrill Lynch says fund managers in its monthly survey are reversing former fears about inflation. A net 18% of the 193 respondents expect global core inflation to fall in the coming 12 months, according to the survey results. This was an overhaul from an earlier survey, when a net 33% expected inflation to rise (see Inflation Fears Mount Among Fund Managers)

Slightly more, but still not the majority of the survey respondents, (24%) believe that the global economy has already entered recession, compared with 20% in July and 16% in June. The managers continue to worry about corporate leverage: The results said the net percentage of investors who believe corporations are under-leveraged has tumbled to 9%, down from nearly 40% at the end of 2007.

“The message from investors to corporates is that if we are headed for a recession, they should clean up their balance sheets and prepare a financial buffer,’ said Karen Olney, chief European equities strategist at Merrill Lynch, in the release. “As banks de-lever, non financial corporates will have to wake up to far less flexible world of credit.’

U.S. Assets Appetizing

Investors are beginning to view U.S. assets as attractive as the economic downturn seeps to the Eurozone and emerging markets, Merrill Lynch said. Investors believe that the U.S. has a better corporate profit outlook and higher quality earnings than the Eurozone, and the net balance of asset allocators overweight in U.S. equities stands at 12%, its highest level in more than six years. Furthermore, a record net 58% of fund managers say the U.S. dollar is undervalued, while a net 71% say the Euro is overvalued, according to the results.

Across the Pond

European investors have responded to the fall in the oil price by selling oil producers and buying into discretionary consumer stocks, according to the release. The percentage of European investors overweight in oil and gas stocks decreased dramatically to 11% in August, from 52% in July. Investors have also significantly scaled back large underweight positions in travel and leisure, personal and household goods, and retail companies. Technology and media sectors, both with significant exposure to consumer demand, also swung back in favor. Last month Merrill Lynch pointed to the safe harbor of healthcare stocks among European investors (see Economic Slowdown Puts Asset Allocation Out of Whack).

A similar outlook about inflation was demonstrated among European fund managers: A net 45% of European fund managers expect the region’s core inflation to fall over the next 12 months; in June, 32% of the European panel were predicting rising inflation.

The European financial sector appears to be on the road to improvement but doubts remain about the sector’s ability to bounce back quickly, Merrill said.

Merrill Lynch believes that the energy sector will continue to be supported by a strong oil price, forecasting oil at $119 in the fourth quarter, underpinned by low, real global interest rates, the firm said.

“The market appears to have overreacted to a fall in the oil price, and investors have turned a blind eye to second round effects of inflation, such as rising wages,’ said Olney. “It will take several months of slowing global growth to be sure that the inflationary dragon has been slain.’

A total of 193 fund managers participated in the global survey, managing a total of $611 billion. A total of 161 managers participated in the regional surveys, managing $432 billion. The survey was conducted with the help of market research company Taylor Nelson Sofres (TNS).