Recession denial is over

FUND managers across the world have turned “super-bearish” over the last month, abandoning hope that Europe and Asia can escape contagion from the United States housing crisis.

A Merrill Lynch survey found that a fifth of big investors now expect an outright global recession, an occurrence not seen since the 1930s. Some think the world is already in recession.

“The period of denial may be over,” said Mr David Bowers, who put together the closely-watched report.

“This month’s survey is the first in which investors have really started to recognise that the ‘credit crunch’ could lead to a major recession.

The vast majority expect profit margins to shrink in 2008.”

The report said global cash balances had jumped to 32 per cent of the average portfolio from 20 per cent as recently as November, with both bonds and equities falling out of favour. The survey covers 195 funds managing US$671 billion ($964 billion) across the three main regions.

The asset managers no longer want firms to take on more debt or pay out bigger dividends — the twin abuses at the height of the credit bubble.

They increasingly want them to batten down the hatches for a long storm by using cash flow to repair balance sheets.

What is striking is the broad perception that the US is no longer the sole epicentre of the crisis.

Indeed, most now think the US dollar is poised to rally as the trouble shifts increasingly to Europe.

A net 55 per cent view the euro as “overvalued”, and a net 61 per cent think the sterling is too high.

Asia is turning pessimistic as well. A net 29 per cent think China’s economy will slow and most are now underweight Chinese equities — preferring the Hong Kong stocks, which offers arbitrage opportunities against over-inflated Shanghai.

None of the regional managers thinks China’s growth rate will rise this year.

The Asian investors expect the region (excluding Japan) to face an unhealthy drift into stagflation, with growth slowing and price pressures rising at the same time. They are massively underweight on autos and media, but like staples and oil.

A net 50 per cent expect emerging markets around the world to deteriorate. A fifth seem to expect the bubble to burst altogether.

Bank and financial firms are the new pariahs.

Merrill Lynch’s credit strategist Barnaby Martin said the banks now faced much the same plight as telecom companies in 2002. “Their efforts to de-leverage will be bad for shareholders, but good for bondholders,” he said.

One glimmer of light is the rising — if small — number who think a fresh cycle of global growth is already beginning, despite the near-panic mood among their peers.— THE DAILY TELEGRAPH

Ambrose Evans-Pritchard has covered world politics and economics for a quarter of a century

Source : Today – 19 Jan 2008

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