Fears of major recession escalate
By Ambrose Evans-Pritchard
Last Updated: 1:23am GMT 17/01/2008
Fund managers across the world have turned "super-bearish" over the last month, abandoning hope that Europe and Asia can escape contagion from the US housing crisis.
A Merrill Lynch survey found that a fifth of big investors now expect an outright global recession, an occurrence not seen since the 1930s. Some 8pc think the world is already in recession.
"The period of denial may be over," said David Bowers, who puts together the closely watched report.
"This month's survey is the first in which investors have really started to recognise that the 'credit crunch' could lead to a major recession. The vast majority expect profit margins to shrink in 2008," he said.
British wealth managers are among the most gloomy. Some 64pc now think the Bank of England is pursuing a "restrictive" monetary policy, an implicit reproach that the Bank of England is holding rates too high as the economy slows sharply and may be falling behind the curve.
Europeans appear to be capitulating as well.
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They are now more pessimistic than at the depth of the dotcom bust, and few now think that inflation is likely to remain a serious threat into the year. A net 80pc expect earnings per share in the region to slide. They have slashed their holdings in industrial groups to underweight.
"It is clear that investors are bracing themselves for a raft of earnings downgrades," said Karen Olney, chief European strategist at Merrill Lynch. She said any falls in Europe's stock markets were likely to be limited since investors have already priced in a sharp drop in earnings.
The report said global cash balances had jumped to 32pc of the average portfolio from 20pc as recently as November, with both bonds and equities falling out of favour. The survey covers 195 funds managing $671bn across the three main regions.
The asset managers no longer want firms to take on more debt or pay out bigger dividends - the twin abuses at the height of the credit bubble. They increasingly want them to batten down the hatches for a long storm by using cash flow to repair balance sheets.
What is striking is the broad perception that the US is no longer the sole epicentre of the crisis. Indeed, most now think the dollar is poised to rally as the trouble shifts increasingly to Europe. A net 55pc view the euro as "overvalued", and a net 61pc think sterling is too high.
Asia is turning pessimistic as well. A net 29pc think China's economy will slow and most are now underweight Chinese equities - preferring the Hong Kong stocks, which offers arbitrage opportunities against over-inflated Shanghai.
None of the regional managers thinks China's growth rate will rise this year.
The Asian investors expect the region (ex-Japan) to face an unhealthy drift into stagflation, with growth slowing and price pressures rising at the same time. They are massively underweight autos and media, but like staples and oil.
A net 50pc expect emerging markets around the world to deteriorate. A fifth seem to expect the bubble to burst altogether.
Bank and financial firms are the new pariahs.
Even though many investors think the shares are becoming undervalued, they fear a "value trap" that could last for months or years.
Merrill Lynch's credit strategist Barnaby Martin said the banks now faced much the same plight as telecom companies in 2002. "Their efforts to de-leverage will be bad for shareholders, but good for bondholders," he said.
One glimmer of light is the rising - if small - number who think a fresh cycle of global growth is already beginning, despite the near-panic mood among their peers.
Last Updated: 1:23am GMT 17/01/2008
Fund managers across the world have turned "super-bearish" over the last month, abandoning hope that Europe and Asia can escape contagion from the US housing crisis.
A Merrill Lynch survey found that a fifth of big investors now expect an outright global recession, an occurrence not seen since the 1930s. Some 8pc think the world is already in recession.
"The period of denial may be over," said David Bowers, who puts together the closely watched report.
"This month's survey is the first in which investors have really started to recognise that the 'credit crunch' could lead to a major recession. The vast majority expect profit margins to shrink in 2008," he said.
British wealth managers are among the most gloomy. Some 64pc now think the Bank of England is pursuing a "restrictive" monetary policy, an implicit reproach that the Bank of England is holding rates too high as the economy slows sharply and may be falling behind the curve.
Europeans appear to be capitulating as well.
advertisement
They are now more pessimistic than at the depth of the dotcom bust, and few now think that inflation is likely to remain a serious threat into the year. A net 80pc expect earnings per share in the region to slide. They have slashed their holdings in industrial groups to underweight.
"It is clear that investors are bracing themselves for a raft of earnings downgrades," said Karen Olney, chief European strategist at Merrill Lynch. She said any falls in Europe's stock markets were likely to be limited since investors have already priced in a sharp drop in earnings.
The report said global cash balances had jumped to 32pc of the average portfolio from 20pc as recently as November, with both bonds and equities falling out of favour. The survey covers 195 funds managing $671bn across the three main regions.
The asset managers no longer want firms to take on more debt or pay out bigger dividends - the twin abuses at the height of the credit bubble. They increasingly want them to batten down the hatches for a long storm by using cash flow to repair balance sheets.
What is striking is the broad perception that the US is no longer the sole epicentre of the crisis. Indeed, most now think the dollar is poised to rally as the trouble shifts increasingly to Europe. A net 55pc view the euro as "overvalued", and a net 61pc think sterling is too high.
Asia is turning pessimistic as well. A net 29pc think China's economy will slow and most are now underweight Chinese equities - preferring the Hong Kong stocks, which offers arbitrage opportunities against over-inflated Shanghai.
None of the regional managers thinks China's growth rate will rise this year.
The Asian investors expect the region (ex-Japan) to face an unhealthy drift into stagflation, with growth slowing and price pressures rising at the same time. They are massively underweight autos and media, but like staples and oil.
A net 50pc expect emerging markets around the world to deteriorate. A fifth seem to expect the bubble to burst altogether.
Bank and financial firms are the new pariahs.
Even though many investors think the shares are becoming undervalued, they fear a "value trap" that could last for months or years.
Merrill Lynch's credit strategist Barnaby Martin said the banks now faced much the same plight as telecom companies in 2002. "Their efforts to de-leverage will be bad for shareholders, but good for bondholders," he said.
One glimmer of light is the rising - if small - number who think a fresh cycle of global growth is already beginning, despite the near-panic mood among their peers.
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