Managers pile into equities

INTERNATIONAL MARKETS: New York

AS THE first quarter ends, money managers are scurrying to invest in US stocks so they don't fall further behind a market that has risen more in three months than most analysts thought it would for the whole year. That means further gains are likely this week in the US stock market, even as analysts slash their estimates for corporate earnings.

Investors are flooding portfolio managers with cash, and it's ending up almost immediately in the stock market. "We're getting to the end of the quarter again, and a lot of fund managers don't want to show themselves with a lot of cash on hand," said Robert Freedman, chief investment officer for John Hancock Funds in Boston. Mutual funds report to their shareholders quarterly, and a large cash balance in a fund that isn't doing as well as the Standard & Poor's 500 index irks shareholders.

The money is coming in because the S&P 500 is already up 13 per cent this year - and most analysts expected only a 10 per cent gain for the whole year.

Stocks rallied to records again last week. The S&P 500 rose 2.9 per cent for the week, the Dow Jones Industrial Average gained 3.5 per cent - topping 8,700, 8,800 and 8,900 for the first time - and the Nasdaq Composite Index added 1.0 per cent.

Industries that are consolidating led the way. Merrill Lynch led brokerages higher on speculation it would be acquired by Chase Manhattan, and thrifts rose on Washington Mutual's agreement to buy HF Ahmanson & Co for $10bn.

Managers are shifting money out of stocks that have done well in the past year or so yet have troublesome earnings outlooks, such as computer companies. They are putting money into neglected areas, such as small stocks or basic industries like aerospace and oil.

The Morgan Stanley High Tech Index is up 16 per cent this year, even though Intel, Compaq and Hewlett-Packard warned that earnings wouldn't live up to expectations.

For the year, analysts expect 9.8 per cent earnings growth, down from expectations of 13.9 per cent at the start of the year.

Investors largely ignored the cloudy earnings outlook because "the general sense is that it is a one-quarter phenomenon," said David Klassen, head of equities for Chase Asset Management. "It will take more than one quarter of flat earnings to convince investors that there is an issue on the earnings side." Besides the demand for stocks from US households, corporations and foreign investors have been snapping up equities. "Foreign buying has been at a fever pitch for the past month or two, which has helped the market's surge," said Charles Crane, chief strategist for Key Asset Management.