GLOBAL - Fund managers’ concerns about high global inflation driven by commodities and wages “ are verging on the obsessive,” according to David Bowers Merrill Lynch’s chief global and European equity strategist.

Bowers referred to the data emerged in this month’s global fund manager survey, which showed 87% of the 303 panellists forecasted higher global inflation in a year’s time - a record. A third of the panellists said their worries about higher core inflation were driven by wages, while 32% said it was by the price of commodities.

Bowers said inflation concerns contrasted with the change in Gross Domestic Product expectations, where a net 9% of fund managers thought the global economy would strengthen over the next year, 39 percentage points lower than three months ago and signs that stagflation (stagnating economies in an inflationary environment) might be returning. Expectations of corporate profits to improve plummeted to 11% this month. compared with May’s 26%.

But in spite of inflation fears and less hope of greater corporate profitability, 42% of managers still planned to use cash flows to increase capital spending, up by one percentage point since May; 32% would return cash to shareholders; while only 23% would improve balance sheets, an option including topping up pension plans.

Monetary policy is seen as “ dangerously lagging behind market expectations,” with 64% of panellists seeing monetary policy as lax. Managers are unanimous in forecasting the next Federal Reserve move in interest rates would be upwards, as the neutral rate was higher. To gauge fund managers’ views, MLIM asked: “What do you consider to be a neutral Fed Funds rate?” Of those surveyed, 45% of equity and 42% of fixed income fund managers said the rate was between 3% and 3.2%.

Sarah Franks, global strategy analyst at Merrill Lynch’s global securities and economics department, said European managers were most overweight in France and Germany. Italy led the list with –29% of managers underweight, below the UK, which had -27%, while Switzerland and Spain both had –9%. Franks partly attributed managers’ underweight stance on Italy to the “corporate governance hangover” brought about by the Parmalat scandal.

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