Investors rule out US Fed rate hike before second half of 2010
A majority of investors expects the US Federal Reserve to hold off from raising interest rates until the second half of 2010, according to a survey by BofA Merrill Lynch.
Asked when they think the Fed will first increase rates, more than three quarters of the panel predict the second half of 2010 or beyond. One in six respondents believes the Fed will not act before 2011.
While inflation has become a nagging worry for investors, they have expressed no conviction that they expect more than a minor increase from the current low level. A net 47 per cent of respondents expect global core inflation to be higher in 12 months, up from a net 39 per cent in October. At the same time two thirds of the panel believe that existing monetary policy is “about right”.
Demand for assets that protect against inflation, such as gold, oil and emerging market equities, has increased. Commodities are at their most popular with the panel since the survey first asked about the asset class in 2005. A net 25 per cent of the panel is overweight commodities, up from 11 per cent in October. A net 53 per cent of the panel is overweight emerging market equities, up from a net 46 per cent in October. Assets that protect against deflation, such as fixed income and utilities, are less popular.
“Investors see inflation as a greater risk than deflation and are hedging that risk with overweight positions in emerging markets and commodities, and an underweight position in the US dollar,” says Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.
Just two months ago investors were sending a clear message that corporates should put debt reduction first and investment, or capital expenditure, second. Now they are less sure. Recent trends suggest that next month they could be willing CFOs to put capex first.
The number of respondents suggesting companies use cash for capital spending has risen to 32 per cent this month from 25 per cent in September. The proportion asking companies to put the balance sheet first has fallen to 36 per cent this month from 50 per cent in September.
Demands for higher dividends are muted with 22 per cent asking companies to prioritise returning cash to shareholders. This was down slightly from 23 per cent in October.
“The last time we saw a shift towards prioritising capex ahead of balance sheet repair was in 2003 and it served as a clear buy signal for equities. It could signal the transfer of risk from equity to credit,” says Gary Baker, head of European equity strategy at BofA Merrill Lynch Global Research.
The shift reflects how risk appetite among investors is tip-toeing upward. The proportion of panelists taking lower than normal risk has shrunk to a net one per cent, down from a net 16 per cent in September.
Higher risk appetite is also evident in emerging markets.
“We are seeing a vivid and extreme bent towards high-beta markets such as Russia and movement away from lower beta markets such as Chile and Malaysia,” says Hartnett.
While a net 22 per cent of global asset allocators view Europe as the most undervalued global market, investors within Europe are wary of their region’s equities. European survey respondents made substantial moves out of cyclical stocks and into defensive sectors over the past month.
More than a quarter of Europeans surveyed increased their positions in healthcare/pharma. A net 16 per cent are overweight the sector in November, compared to a net ten per cent underweight in October. Over the same period Europeans swung to a net five per cent underweight technology from a net 23 overweight in October. These changes came despite more panelists predicting stronger economic growth in Europe over the coming year.
One notable factor weighing against European equities, however, is currency. A net 49 per cent of the global panel view the euro as overvalued and a net 36 per cent view the dollar as undervalued.
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