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Fund managers see interest rates rising - Merrill

UK – Fund managers expect interest rates to be higher a year from now despite the recent surprisingly low US non-farm payroll data, says Merrill Lynch’s chief global strategist David Bowers.

He was speaking at a briefing presenting the findings of Merrill’s monthly survey of fund managers.

The survey found that managers’ risk appetite was also found to be little changed – although the poll had been concluded the day before last week’s bombings in Madrid.

“The tragic events in Madrid will not have been reflected in this month’s survey,” the report states.

A “big surprise” has emerged this month, Bowers said, explaining that managers were ‘hawkish’ on interest rates, meaning they expected them to rise, in spite of their expectations of a slowdown in global growth.

Bowers said he did not think the US employment numbers, which had sent a shock through the markets, necessarily spelt gloomy news for the economy. But he said the data raised the issue of “growth sustainability” with the US economy being currently kept going by tax cuts and low interest rates.

“Ninety per cent of the panel still think that next move is up and not down and 75% believe the Fed Federal_Reserve will tighten in the next six to nine months,” Bowers said.

“People are tactically reducing cyclical rotation. We have a less cyclical bias.” Bowers added there was no “classic defence stance” amongst managers polled.

Seventy-three percent of those polled also thought bonds were still overvalued while 56% of them expect higher corporate profits in a year, a drop of twenty percentage points since the beginning of the year.

The gap between managers on the issue of using cash flow to improve balance sheets, including topping up company pension plans, and returning cash to shareholders, at its widest in June 2003, has closed.

“The country most European managers are overweight continued to be Germany,” the report added. Managers were most underweight Italy.

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