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OCBC Fund Poll: Managers sanguine about the outlook but concerned about oil prices

OCBC’s Wealth Management Unit recently polled 16 fund managers for their views on the global economic and investment outlook for the fourth quarter of this year and beyond.

While fund managers were generally sanguine about the outlook, they also expressed concerns about higher oil prices and its impact on inflation and interest rates.

Aberdeen Asset Management, ABN AMRO Asset Management, Allianz Global Investors, DBS Asset Management, First State Investments, Henderson Global Investors, HSBC Investments, ING Investment Management, Mirae Asset Global Investment,Lion Capital (the merged entity of OCBC Asset Management and Straits Lion Asset Management), Philip Capital Management, Prudential Asset Management, SG Asset Management, Schroder Investment Management, Templeton Asset Management and UBS Global Asset Management participated in the poll.

Sanguine about the outlook for global growth

Fund managers seemed sanguine about prospects for economic and earnings growth. However, they alluded to the possibility that growth is likely to moderate, especially next year, taking into account the impact of higher oil prices and Hurricane Katrina on the US economy. They were wary of oil prices and said that if it continued to surge, this could hurt consumer and business sentiment and dent growth even further.

Equities remain the favoured asset class

Given their sanguine outlook for growth, most fund managers favoured equities over bonds. Some of them also felt that valuations for equities were more attractive compared with bonds, while rising inflation and interest rates were seen capping bond prices.

Asia still the favoured region

Fund managers continued to favour Asian stock markets over bourses in other regions. Asian markets were favoured for their superior growth and valuations. The potential for currency revaluation was also cited as a factor in favour of Asian equities.

Japan gaining favour

Some fund managers expressed optimism about Japan. Aside from the structural changes in the Japanese corporate sector, recent data showing an improvement in economic growth, has also given rise to optimism about prospects for the Japanese economy and stock market. Koizumi’s victory at the polls has also raised hopes of more reforms in Japan.

However, there were fund managers who were sceptical about the recent rebound of the Japanese bourse, as they saw deflation continuing to plague the economy. But there were also others who were more optimistic, and felt that deflationary pressures would soon show signs of easing up.

US Dollar seen range trading in the short-term

Fund managers seemed mixed about the outlook for the US dollar in the short-term. Some expected higher US interest rates to offer support for the greenback, despite concerns that Hurricane Katrina may dent US economic growth and weigh on the US currency. Medium- to long-term however, fund managers were generally bearish on the US dollar given the risk that the structural deficits in the US could balloon further.

Renminbi and Asian currencies poised for further upside

In July this year, the Chinese government allowed its currency to appreciate by 2.1 per cent against the US dollar. Fund managers reckon that China will allow its currency to rise further, although any appreciation is likely to be gradual. This should also augur well for Asian currencies and could lead to increased interest in Asian bourses.

Inflation and interest rates seen creeping up

With high energy prices, slowing productivity and rising unit labour cost, inflation rates in the US and elsewhere are expected to creep up. Consequently, interest rates are expected to continue rising, with the Fed fund rate expected to rise to 4 per cent to 4.5 per cent before peaking early next year.

Greenspan’s departure unlikely to create uncertainty

Mr Alan Greenspan, whose 18-year tenure ends in January next year, will leave behind a highly regarded and well-respected legacy as a strong inflation fighter. The skills of his successor, whom President George Bush will soon name, will likely be put to the test in the months ahead. Market watchers have expressed concerns that Mr Greenspan’s departure will create an initial period of uncertainty until markets gain an understanding of the new Fed Chairman’s stance towards monetary policy. However, many fund managers do not appear too perturbed and have faith that Mr Greenspan’s eventual successor will be carefully chosen to ensure continuity in monetary policy, aimed at keeping the US economy stable and inflation low.

Oil prices seen as a key risk factor

It was very clear that high and rising oil prices were key concerns among fund managers. Although skyrocketing oil prices have not had a significant effect on economic growth and inflation so far, it could still rear its ugly head next year. If this happens, central banks, including the Fed may adopt a more hawkish monetary policy. There were also concerns that higher inflation will cause US long-term rates to rise further, affecting the US housing market and consumption spending adversely.

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