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Fund managers favour equities

A March survey by Merrill Lynch found that global fund managers are more bullish on equities than at any time in the past six years.

The survey questioned 302 fund managers with a total of 994 billion dollars under management, 59 per cent of them are overweight in equities – the highest percentage since Merrill Lynch began their surveys in 1999. The managers favour the Eurozone, Japan and emerging markets, and prefer energy and industrial stocks over utilities.Also, for the first time since last June, the participants said they expected the global economy to strengthen over the next year rather than weaken.

Merrill Lynch chief global investment strategist, David Bowers, observed: “People are positioned for growth surprises in no uncertain terms. That comes across in big letters the size of a 12-storey building.”

A new “golden era”?

A recent editorial in the Financial Times announced that the “bulls feel their time has come again…After years in which the tone of debate has been set by those worrying about the US trade deficit and loose monetary policy, some are now starting to talk about a new “golden era”.

A key reason for this new optimism is the improvement in China and other emerging markets, which are now proving to be significant positive factors.

According to Anais Faraj, an economist and market strategist at Nomura, “global productivity is rising as economies in Brazil, India and China enter the mainstream.As a consequence, inflation in the major markets continues to fall. We appear to be repeating the benign “golden age” cycle that spanned 1955-74.”

He explains that the world economy is no longer dependent on the US consumer.Today, growth and investment flows between emerging markets are the driving forces, which will be beneficial for financial assets. “Global liquidity is abundant, capital expenditure and consumer demand is rising, corporate balance sheets and efficiency look better than they have for a long time and interest rates are low.”

The chief economist at Cazenove, Eric Lonergan, agrees with this positive sentiment on emerging markets, saying they are stronger than in either 1994 or 1997-1998. Their current account surpluses, net external assets and cheap currencies reduce the change of a widespread emerging markets downfall and remove a source of instability from financial markets.

The author of the FinancialTimes article concludes with a slightly more cautious tone, commenting that for these bulls to be proved right, the markets will probably need a couple more years of solid global growth, without any crises in the foreign exchange and bond markets.

US Federal Reserve raises rates…and more to come

The US Federal Reserve Bank raised interest rates for the seventh consecutive month on March 22, and signaled an increased concern about inflation.

The rate move was widely expected and, in the accompanying statement, the policymaking Federal Open Market Committee said that it expected to continue to raise rates at a “measured pace”.

The Bank did, however, note some concerns: “Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident.” It said that the risks to growth and inflation were roughly equal, but made it clear that this judgment was based on “appropriate monetary policy action”. This was interpreted as a hint that the Fed may either increase the size of a future rate rise, or else continue with the quarter point rises for longer than previously expected.

On the positive side, the Fed described the pace of growth as “solid”, a more upbeat assessment than its previous view of “moderate” growth, despite rising oil prices.

More warnings about the future

for hedge funds

New voices were added in mid-March to the recent chorus of doom-mongers warning that hedge funds cannot continue to deliver benefits to an ever-increasing universe of investors, with both UBS and consultants Watson Wyatt issuing cautionary reports.

Watson Wyatt’s report focuses on the quality of hedge fund management, estimating that out of around 6,000 hedge fund managers, only five per cent to 10 per cent are skilled enough to be able to add significant value after fees are allowed for. “We estimate that our top-rated fund of hedge fund managers account for roughly eight per cent of the market,” the report said. “Taking only our estimate of the assets of highly skilled hedge fund managers, 225-450 billion dollars, these funds of hedge funds would account for about 15-30 per cent of the top talent.”Watson Wyatt also says there are capacity constraints in the hedge fund market: “It follows that a lot of investors in hedge funds are going to be disappointed.”

Investment bank UBS issued an 80-page research report pointing out that generating alpha is becoming more difficult: “Expectations of future hedge fund returns could be… too high, and potentially a source of disappointment.”

Johan Ahlstroem, head of Allianz AG’s unit Allianz Hedge Fund Partners, says the hedge fund boom of 2004 is not expected to continue this year. While he thinks that the German hedge fund market will continue to grow this year, he does not expect to repeat last year’s strong growth.

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