Far East reaches `turning point'

British and American fund managers are nervous about the short- term outlook for all equity markets and are piling into bonds and cash, while the currency panic that has swept Asia is now priced into markets and presents a buying opportunity, according to Merrill Lynch.

Bijal Shah, global strategist at Merrill, says its latest global fund manager survey completed on 3 September showed that "the currency crisis which started in Thailand and which led to plunging equity markets among the Asian `Tiger' economies has prompted the most extreme sell-off of equities since 1990." He said it was even worse than the sell-off following the Mexican peso crisis in 1995, but added: "With this extreme reaction we may have come to a turning point. The Asian markets have priced in the worst possible news. They now represent a buying opportunity."

Mr Shah said many of the Far Eastern markets had recovered substantially since the survey was completed last week.

Fund managers were piling into gilts and US government bonds "with a keenness I have never seen before", he said. In the US an increasing number of managers were expecting an interest rate rise and slowing economic growth.

Merrill's monthly survey covered 259 institutions managing funds worth $5.55 trillion (pounds 3.5 trillion). It is split into five regional surveys carried out between 29 August and 3 September.

The bearishness towards Asia had transmitted itself to other developing regions such as South America, said Mr Shah. "Interestingly, managers are less keen on raising their exposure to Latin American stocks. The crisis in tiger markets appears to have reduced the appetite for emerging markets."

Merrill last week raised its strategy to neutral from underweight on the region. Its favourites are Hong Kong and Singapore.

The investment bank said that with the exception of Japanese equities, UK managers were on balance looking to cut their exposure to equity markets. Even towards Japan, buying interest had slumped, with buyers outnumbering sellers by just 9 per cent, the lowest since January.

Yet towards UK government gilts, buyers outnumbered sellers by 24 per cent, the most bullish view since December 1995.

This was in line with a drop in the number of respondents who expect inflation to rise through the coming year to 69 per cent, well down from last October's peak of 99 per cent.

On UK equities - where some 55 per cent of the UK institutions' funds are allocated - the survey found that sellers outnumbered buyers by 12 per cent, the same as in the last survey.

Separately, the slump in South-east Asian currencies did not need big region-wide intervention from the US, said the US Assistant Secretary of State for East Asian and Pacific Affairs, Stanley Roth, yesterday. "We're still watching and talking to other players including the international financial institutions, and we'll make a determination if necessary to some subsequent action that's required," he said.

Hamish McRae, page 21