OCBC poll: Fund managers see slower growth in equities

Fund managers remain largely pessimistic over prospects for stock markets for the second half of the year citing continued fallout from the US sub-prime crisis as well as inflation concerns, according to a poll by OCBC Bank's wealth management unit.

Many of the 15 fund management companies are of the view that the economic blowout from the US will continue to have an impact on global growth. Noted Aberdeen Asset Management, 'House prices in the US are likely to fall further, and we may see more write-downs from financial institutions on mortgage-backed securities that use owner-occupied homes as collateral.'

Prudential Asset Management (Singapore) added that while the sub-prime crisis has seen its worst, problems still lurk with other forms of securitised debts such as those related to credit cards.

As a result, Henderson Global Investors pointed out that doubts over the full impact of the crisis on economic activity are likely to linger. "Banks in the US and Europe have tightened credit conditions aggressively and the lower credit availability will hold back economic activity," it noted.

Besides the credit crisis, some fund managers also expressed their concerns over the impact inflation will have on economic growth, especially the actions that central banks will take to tackle the problem.

First State Investments noted that central banks are under pressure to raise interest rates to dampen inflation, which will raise borrowing costs for companies.

"The harder the line taken in terms of raising interest rates to combat the situation, the worse the final outcome for growth becomes," said DBS Asset Management.


Earnings downgrade

Fund managers were also concerned that earnings expectations may be too high and warned that earnings downgrades could weigh on equity markets.

DWS Investments, for instance warned that the full impact of inflation and pressures on consumer demand has yet to be fully discounted.

Schroder Investment Management noted that "the risk of earnings disappointments and downgrades are real" while Lion Global Investors was of the view that "downward revisions to earnings are likely to continue."

HSBC Global Asset Management said that it is broadly neutral with respect to asset classes, as it does not expect bonds or equities to offer significant value in the short-term. "Equity markets will be volatile as the uncertainty over the credit crunch and its effects on the wider economy have not been played out fully yet," said HSBC.

Said Allianz Global Investors, "At this juncture, equities are not expected to perform well given that downward earnings revisions are likely to take place." It added that it favoured short-term money market instruments and cash while Schroder said it is currently slightly underweight in its equities portfolio.


Still value in equities?

Lion Global Investors, however, said it favours equities over bonds in the longer term as equity valuations are relatively more attractive. "We like investment themes in Asian infrastructure and large cap, high quality companies in Asia with a greater domestic focus, as we believe that the region's relative structural fundamental strengths remain intact," it added.

UBS Global Asset Management said that among global equities, it finds better relative valuations in markets like the US, UK and Switzerland. As for the Asian region, it's positive on India and Indonesia due to the high long-term growth potential in these markets while Aberdeen said it remains positive on Asian equities and sees any sharp pullbacks as an opportunity to accumulate. Barclays Capital said it finds value in US and European equities while it is cautiously bullish about energy and basic resources. DWS Investments said it favoured investments in soft and hard commodities such as gold and precious metals, which it reckons will do well in an inflationary environment.

While most fund managers do not see a full-blown US recession, Phillip Capital Management was of the view that the US is already in a recession though not necessarily a deep and protracted recession given the monetary policies by the US Federal Reserve.



Click for full OCBC Bank report

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