Inflation not a threat, say managers

The survey suggests investors could view oil prices as more of a threat to corporate profit margins than as a trigger to higher inflation. The group’s chief investment strategist David Bowers says:

“Investors have been worrying too much about interest rates and inflation, and not enough about profit margins.”

Although 95% of the managers polled in the survey expect the US Federal Reserve to raise interest rates again, more now say this will not occur as early as previously expected. The survey also suggests US equities are at their least popular level since 2002. Some 40% of managers felt the country has the worst outlook for profits and as a result they are continuing to decrease their equity allocation.

Other findings in the survey include a general view that the global economy is slowing down, an increased confidence in emerging market equities, and that a focus is required on cost reduction rather than price increases to generate earnings growth.

The US, UK and Pacific ex Japan economies are all expected to weaken over the next 12 months. Merrill Lynch strategy analyst Sarah Franks says: “Asian managers are more worried about inflation than their global counterparts, particularly in China.”

Fund managers, driven by a renewed optimism in China’s economy, have increased their investment in emerging market equities. Over
one-third of respondents, representing an increase of 14% from the previous month’s figure, said emerging markets had the best outlook for corporate profits.

Cyclical stocks are also still in favour, despite weak growth expectations. On average, managers’ allocations are most overweight in energy and most underweight in automobiles, while there has also been a big move out of consumer staples.

A total of 303 managers participated in the global and regional surveys, which were conducted between October 8 and October 14 with the help of market research company Taylor Nelson. The impact of the sharp fall in metal commodity prices on October 13 is unlikely to have been reflected in the poll.

SeeNews Analysis, page 12