Pessimism grows and turns negative on profits

Economic optimism continues to slip to record lows this month, according to a monthly survey of fund managers, conducted by Gallop for Merrill Lynch. Latest figures show that only 4% of Asian fund managers expect a stronger Pacific economy, a drop from November’s 11% and the lowest since the survey began. This is mirrored by the 4% who expect a stronger global economy. In contrast, although optimism about the Chinese economy also fell from 74% to 52%, it remains significantly stronger than those figures for the rest of the region.

In keeping with the negative trend, fund managers generally think the outlook for Asian corporate profits is “unfavourable” for the first time since December 1998, but paradoxically a record balance sees the region’s equities as undervalued. Financials and defensives remain the favourite broad sectors, and the shift away from growth stocks continues with 60% now preferring value. On a global scale, most managers say that they are underweight in tech, media and telecom stocks and would like to increase their exposure over the next year, which is the opposite situation to March 2000.

Commenting on the outlook for Asia, Trevor Greetham, global strategist at Merrill Lynch, says: “The expectation of lower US and global interest rates may explain why fund managers are keen to cut their cash holding. They are strong buyers of Hong Kong and Chinese equities.”

No Asian fund manager expects interest rates to rise in the US, Hong Kong or Singapore over the next year and few expect to see rate hikes in Australia and Korea. Meanwhile, 28% of global fund managers see a chance of a US credit crunch in 2001 and 23% see a chance of a full-blown recession. On the up side, 86% expect the Fed to ease policy sufficiently to offset any credit problems, as they did in 1998.