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    Investors fear inflation more than growing stagflation

    Hurriyet English with wires
    14.05.2008 - 17:43 | Son Güncelleme:

    Stagflation fears are gripping investors, but inflation concerns are fast overtaking worries about economic growth, according to Merrill Lynch's Survey of Fund Managers for May published on its website on Wednesday.

    According to the survey, fund managers were slightly less negative in their expectations for economic growth and corporate earnings. Fewer panelists believe the world has already entered recession — 18 percent took that view in May, down from 24 percent in April. 

    The number expecting recession within a year fell to 29 percent from 40 percent. Instead, investors are focused on inflation. A quarter of respondents expect global core inflation to rise in the coming 12 months, compared with just 7 percent in April.

    "Evidence is pointing to a possible sell-off in bonds as inflation worries mount," said David Bowers, independent consultant to Merrill Lynch. "A sharp rise in bond yields could help convert this financial crisis into an economic crisis."

    This is prompted predictions of higher bonds yields, with 80 percent of investors expecting long-term rates to be higher a year from now. In contrast, fewer respondents predicted higher short-term rates.

    "In a slowdown, earnings momentum drives out-performance — not value. The relentless need for food and infrastructure in developing markets means that commodities, and not labor, are the scarce resources in this cycle, and this scarcity means pricing power," said Karen Olney, chief European equities strategist at Merrill Lynch.

    "Banks, on the contrary, are being penalized for earnings decay. While still unloved, this month they are no longer seen as cheap as they move from value trap, implying upside, to trap status," Olney added.

    One month ago, nearly a quarter of Eurozone and U.K. investors said banks were undervalued, and that number has now fallen to zero.

    The threat of stagflation is also bad news for company pension plans. Indexation means a rising cash-call at a time when profits are moderating for many, while developments in the U.K. are being watched closely.

    "Investors might not appreciate that the U.K. Pensions Regulator has the power to ensure pension contributions rank ahead of dividends. As of April 14, these powers have been strengthened," said Olney.

    Photo: AP

     

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