EUROPE - A growing number of institutional investors think that corporates should plug debts such as pensions fund deficits before focusing on growth to improve their profits.
Recent figures showed that less than one company in 10 remained in surplus, with the aggregate surplus exceeding e6bn (US$6.3bn) at year-end 2002, compared with one in six and e14bn respectively at year-end 2001. Over 25% of those companies posted a deficit of more than e1bn, compared with one in five in 2001, while one-half continued to post surpluses or deficits below e250m.
According to Merrill Lynch Investment Managers, despite the collapse of credit spreads seen during the last nine months, 56% of investors still want companies to use their cash flow to reduce debt, rather than invest for growth. At the beginning of the quarter this figure was 47%.
Meanwhile, sluggish performance in eurozone economies is also sapping fund manager confidence in equities. Cash reserves have also dried up.
MLIM polled 270 fund managers representing US$561bn.
David Bowers, chief investment strategist, said: “Before fund managers end their love affair with bonds and switch into equities they need to see much more compelling evidence for an upswing in the world economy.”
The average cash balance slumped to under 4% in June, with 60% of managers now underweight or neutral in cash, the most fully invested fund managers have been in the past two years.
Some 50% of fund managers see world stock markets as fairly valued, reversing 12 straight months in which most managers described equities as cheap. Meanwhile, even though a third of fund managers believe bonds to be overvalued, bond prices have not fallen and are unlikely to do so until GDP growth expectations rise decisively.
Regionally, the gap between the Eurozone and the US has become starker.
Eurozone countries are seen as having much less favourable conditions for corporate profits than the US and the quality of Eurozone company earnings is deemed to be poorer. A third of respondents intend to underweight Eurozone assets over the next year. Although the euro is increasingly seen as the most overvalued major currency, all five of the world’s top currencies are out of favour with investors.
Overall, there are some encouraging signs that confidence is creeping back. The mean expectation for nominal GDP growth for the G7 area rose from 3.1% to 3.3%, top-line sales growth is strengthening and appetite for risk has returned to normal, said Bowers.
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