Fund managers build up their cash piles

Fund managers are turning their backs on shares in favour of cash and gilts, figures showed yesterday. They are sceptical of the Bank of England's belief that interest rates are high enough to keep inflation in check and worried that economic growth will slow over the next year.

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.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

The saffron censorship that governs India

Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
Prince Charles' 'black spider' letters to be published 'within weeks'

Prince Charles' 'black spider' letters to be published 'within weeks'

Supreme Court rules Dominic Grieve's ministerial veto was invalid
Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

How did fandom get so dark?

Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
The galaxy collisions that shed light on unseen parallel Universe

The cosmic collisions that have shed light on unseen parallel Universe

Dark matter study gives scientists insight into mystery of space
The Swedes are adding a gender-neutral pronoun to their dictionary

Swedes introduce gender-neutral pronoun

Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

Disney's mega money-making formula

'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

Lobster has gone mainstream

Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
Easter 2015: 14 best decorations

14 best Easter decorations

Get into the Easter spirit with our pick of accessories, ornaments and tableware
Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

Paul Scholes column

Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

The future of GM

The greenhouses where Monsanto 'plays God' with the future of the planet
Britain's mild winters could be numbered: why global warming is leaving UK chillier

Britain's mild winters could be numbered

Gulf Stream is slowing down faster than ever, scientists say
Government gives £250,000 to Independent appeal

Government gives £250,000 to Independent appeal

Donation brings total raised by Homeless Veterans campaign to at least £1.25m
Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

The most borrowed book at Bank of England library? Oh dear

The book's fifth edition is used for Edexcel exams
Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

Cowslips vs honeysuckle

It's the hunt for UK’s favourite wildflower
Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

Did a botched blackmail attempt help Cyril Smith escape justice?

A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss