Fund managers see light at the end of the tunnel

Written by Markets Bureau | Mumbai | Updated: Dec 26 2008, 07:19am hrs
As the year of shocks comes to an end, the deep pessimism that was injected into the investing system appears to be finally abating. According to a global survey carried out by Merrill Lynch, fund managers around the world have started seeing light at the end of the tunnel.

The survey, of 206 respondents carried out earlier this month, states, With risk aversion showing signs of moderating (from very extreme levels), cash levels at the highest since 2001, and some belief that monetary policy is starting to have an impact, running textbook defensive asset allocations going into New Year may start to carry greater risk.

Against this backdrop, managers pulled cash out of money market funds for the first time in 13 weeks, says the latest report from asset allocation tracker Emerging Portfolio Fund Research (EPFR) Global of the US. However, these funds still have accumulated about $320 billion worth of net inflows from investors so far this year and there is a lot of cash waiting to be allocated.

In the past week, investors chose to move some money into US, European and Chinese equity funds and higher yielding fixed-income fund groups. This, EPFR Global adds, is a further indication of investors increasing appetite for risk in the run-up to the New Year.

With so much cash waiting to be allocated, possible news on fiscal stimuli could trigger a sharp rally, says the Merrill Lynch survey. From a valuation perspective, for the third month running a majority of fund managers believe that equities are undervalued. But they are still worried that it is a value-trapand when it comes to asset allocation, they still prefer bonds to stock.

This could be because 87% of managers believe that consensus earnings estimates for 2009 are still too high. The good news is that monetary policy is seen as less restrictive. Back in October, 68% thought that monetary policy was too restrictive; this month, the figure has more than halved to 29%.

A majority of those surveyed expect further easing, with lower short-term interest rates at the end of next year and a steeper yield curve. Asset allocators still remain overweight on cash and bonds at the expense of equities, and continue to walk away from property and commodities as asset classes. US equities are still the most favoured region. What has changed is that the dollar is no longer seen as undervalued; investors now regard both oil and gold as undervalued.

As investors start to look into 2009, 88% of respondents are hunkering down for a year of below-trend growth and inflation. And there are only four global sectors that they wish to overweight: healthcare, telecom, utilities, and consumer staples, the report says.