Investors have highlighted their concerns about world-wide currency misalignment amid growing gloom over the global economy, according to Merrill Lynch’s Survey of Fund Managers for April.
At a time when G7 policymakers have been warning that excess volatility and disorderly movements in exchange rates are undesirable for economic growth, investors have signalled that they believe exchange-rates have already departed from fundamentals. April’s results are some of the most extreme currency readings in the survey’s history. A net 50 percent of asset allocators regards the U.S. dollar as ‘undervalued’, up from a net 30 percent three months ago. In contrast, a net 71 percent sees the euro as over-valued, up from 55 percent in January 2008. More worrying perhaps, is that a net 52 percent of investors still believes that sterling is overvalued despite its recent collapse.
“Investors are beginning to acknowledge sterling’s biggest depreciation against other European currencies since 1992,” said David Bowers, independent consultant to Merrill Lynch. “What is striking is investors’ fear that further decline is still to come, thereby resulting in their taking an even greater bearish stance on U.K. equities.”
Outlook for U.K. equities hits four-year low
The gloomy outlook for sterling comes after declines in value over the past six months of more than 13 percent against the euro - sterling’s largest decline since it left the Exchange Rate Mechanism - and 17 percent against the yen. Fearful of further currency losses, global asset allocators continue to shun the U.K. stock market in spite of the broader global equity rally of the past month. Their underweight position on U.K. equities is at a four-year high and is the second most aggressive that the survey has recorded. A net 31 per cent of asset allocators are now underweight U.K. equities compared with a net 17 per cent in March.
Eurozone investors moving out of inflation-sensitive sectors
One puzzle this month is the extent to which global investors remain comparatively relaxed about inflation despite persistent rises in commodity prices, including those in the eurozone. The survey suggests that eurozone investors remain highly consumed by the outlook for growth, and appear to have become oblivious to the risk of inflation. The number of investors who expect core inflation in the eurozone to rise in the next 12 months has fallen to a net 2 percent in April from a net 20 per cent in March. Furthermore a net 48 percent of European investors believe that monetary policy is too restrictive, up from 13 per cent six months ago.
Dramatic swings in asset allocation underscore this theme. European investors are pulling back from the commodity-based stocks they have relied on to capitalise on rising inflation, especially over the past year. Investors have slashed overweight positions in Basic Resources and Utilities and reduced their overweights in Oil & Gas.
“A degree of profit taking makes sense given the gains we have seen in sectors such as Basic Resources. But the question is whether these inflation-sensitive stocks have truly lost their market leadership,” said Karen Olney, chief European equities strategist at Merrill Lynch. “A wholesale change out of commodity-exposed stocks would coincide with the view that inflation is cyclical rather than secular.”
Investors have redeployed proceeds by reducing underweight positions in Retail and Automobiles and by making a significant move back into Insurance.
Inflation is key threat to Asia
A lack of fear over inflation is also echoed in Asia. The number of investors in Asia (excluding Japan) who expect inflation to rise over the coming year in April has fallen sharply to a net 15 per cent in April from a net 63 percent in March. However, data is testing this view. In China, food inflation surged to 20.8 percent in the first two months of this year, pushing up headline CPI inflation to an 11 year high at 8.7 per cent. Merrill Lynch expects annual inflation to reach 6.9 per cent in 2008.
“We think inflation, not a sharp drop in growth, remains the key macro risk for China and the region,” said T.J. Bond, chief economist for Asia-Pacific (ex-Japan), Merrill Lynch. “Unfortunately, we do not expect inflationary pressure to abate soon.”
A total of 202 fund managers participated in the global survey from 4 April to 10 April, managing a total of U.S.$659 billion. A total of 182 managers participated in the regional surveys, managing U.S.$405 billion. The survey was conducted with the help of market research company Taylor Nelson Sofres (TNS). Through its international network in more than 50 countries, Taylor Nelson Sofres provides market information services in over 80 countries to national and multi-national organizations. It is ranked as the fourth-largest market information group in the world. Survey results were analysed by David Bowers, who is joint managing director of Absolute Strategy Research Ltd, a financial services consultancy.
Merrill Lynch Global Securities Research & Economics Group has consistently achieved high rankings for its equity and fixed income research in numerous regional and global investor surveys, such as Institutional Investor, The Wall Street Journal, LatinFinance, Asiamoney, Euromoney, Extel and Reuters.
Merrill Lynch is one of the world's leading wealth management, capital markets and advisory companies, with offices in 40 countries and territories and total client assets of almost $2 trillion. As an investment bank, it is a leading global trader and underwriter of securities and derivatives across a broad range of asset classes and serves as a strategic advisor to corporations, governments, institutions and individuals worldwide. Merrill Lynch owns approximately half of BlackRock, one of the world's largest publicly traded investment management companies, with more than $1 trillion in assets under management. For more information on Merrill Lynch, please visit www.ml.com.
