Fund managers build up their cash piles
Tuesday 12 August 1997
According to a survey of institutional intentions by Merrill Lynch, the investment bank, most fund managers believe almost all the world's equity markets will fall over the next three months. As a result they are adding to their cash piles for the first time since last July.
In 1997, cash has made up between 5 and 6 per cent of the typical pension fund portfolio, the highest level of liquidity since 1991. Buyers of government bonds have also outnumbered sellers by 22 per cent.
The money managers' concerns were allayed to an extent yesterday by relatively benign producer prices data which showed the price of manufactured goods rose by 0.2 per cent in July, giving an annualised rate of output price inflation of just 1.4 per cent. The FTSE 100 index responded by closing almost unchanged at 5,031.9.
Economists said once account was taken of Budget increases in excise duties, the underlying picture was of very subdued inflation at the factory gate level. Input prices, meanwhile, continued to fall thanks to the strong pound, which yesterday closed almost 3 pfennigs higher at DM2.95 after last week's heavy falls.
But the scepticism of the fund managers was borne out by figures yesterday from the British Retail Consortium (BRC) showing generally buoyant growth in high-street sales as building society windfalls started to find their way into home improvements and one-off purchases of dishwashers and computers.
According to the BRC retail sales monitor for July, the value of retail sales grew by 5.2 per cent on the previous year, compared to growth rates of 4.5 per cent in June and 4.8 per cent in May. Although down on last July's growth rate of 6.3 per cent, the figures showed consumers have so far failed to react to the four interest rate rises the Bank has announced in as many months.
The caution of British investing institutions is in marked contrast to American fund managers, who remain bullish despite the high level of the Dow Jones Index and signs that the bond market is heading lower as fears of inflation rise.
According to Bijal Shah, global strategist at Merrill Lynch, US mutual funds are holding a lower proportion of cash than at any time in the past 20 years. Merrill Lynch has turned bearish on the London market, largely as a result of worries about Wall Street, where it believes the market is poised for a sharp correction.
"The outlook for global equities is dominated by Wall Street. Interestingly, in our US fund manager survey, the number of managers who expect inflation to rise over the coming year has risen to 45 per cent from 28 per cent last month. If inflation does rise, the Federal Reserve will tighten monetary policy and this could cause a correction in equity prices."
Markets on both sides of the Atlantic will focus on inflation this week, with a raft of data expected in the US and UK. Yesterday's retail sales numbers at home will be followed by their US equivalent tomorrow. Wednesday will have British unemployment and average earnings numbers.
On the outlook for interest rates, fund managers are at odds with the Bank of England, which accompanied the most recent rate rise to 7 per cent with a hint that rates would not have to rise further in the short term. Merrill Lynch's survey, conducted on the three days before the rate rise, showed managers expecting base rates of 7.4 per cent in a year's time.
Merrill Lynch takes an even more pessimistic view of the cost of money, believing rates could rise higher than that.
"With continental European economic activity accelerating, UK growth and base rates could go higher than most of these managers are expecting," Mr Shah said.
Recovery in Europe provided the only bright spot in the survey for stock markets with 21 per cent more fund managers expecting continental equities to rise over the next three months than fall over that period. More investors expect falls than rises elsewhere, with the greatest degree of pessimism reserved for Pacific Basin markets outside Japan.
Only Hong Kong is viewed as a safe haven in the Far East, with the rest of the area perceived to be paying the price for the rapid growth of the late 1980s and 1990s which resulted in a property boom. In Malaysia, the amount of retail space in the country is expected to double over the next two years.
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