Mumbai: Further to its survey of fund managers in September 2004, which had predicted the hike in repo rates between 25 and 50 basis points, Merrill Lynch again surveyed fund managers and CIOs this month for their views on the market and their portfolio strategies.

A majority of the 16 fund mangers and CIOs, who between them managing over Rs807 bn in assets, were bearish (50 per cent) in the short term with 38 per cent expecting the market to be stable.

However, on the long-term projections on the prospects of the markets, there was a swing with 56 per cent of the respondents being bullish and only 25 per cent still bearish.
Some high lights of the survey:

Credit Spreads
The consensus continues to be that the credit spreads would widen, both in the short term as well as long term. The outlook for the short-term was largely unchanged, 67 per cent expected a widening of the credit spreads and the rest expecting spreads to be stable.
Though the long-term outlook was largely in step with the short-term outlook, the response appeared an acknowledgement that spreads are not widening as expected.

Returns
Fund managers voted floating rate funds as the category that would outperform other categories over a one-month perspective. 60 per cent of the respondents ranked floating rate funds on top with the balance views divided equally between short-term debt funds and long-term gilt funds.

Over a one-year horizon, the ranking favoured long term gilt funds (8 out of 15) followed by floating rate funds. At the same time, 6 of the 15 respondents also expected long-term gilt funds to underperform other categories.

Portfolio Strategy
Fund managers, in the income fund categories plan to maintain duration (44 per cent), decrease bond allocation (56 per cent), increase gilt allocation (38 per cent) and increase or keep cash levels stable (38 per cent each) in November, likely indicating an improved outlook on gilts.

In the gilt categories, 31 per cent each said that they planned to reduce or keep duration stable and 38 per cent favoured keeping gilt allocation stable.

Economy
Fund managers were more bullish on economic growth prospects, likely reflecting the strength of investment demand and credit growth. The outlook on the winter crop has also improved. 63 per cent expect a stronger economy followed by 31 per cent expecting stable growth and only 6 per cent expecting a weaker economy. However, the outlook on inflation deteriorated marginally. 56 per cent expect inflation to ease, 25 per cent expect it to be stable with the balance expecting inflation to rise. Bullish expectations on the currency continue to build. 75 per cent of the respondents expect the INR to appreciate against the US Dollar while the balance expects the exchange rate to be stable. No one expects the rupee to weaken.