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DSP Merrill Lynch fund managers survey reveals continuing optimismnews
Our Corporate Bureau
21 January 2005
According to a survey of fund managers and CIOs conducted in early December 2004, for their views on the market and their portfolio strategies showed continued optimism in the economy. No respondent expects a weaker economy. 61 per cent of fund managers expect inflation to ease, though the central bank has indicated otherwise.

The highlights of the survey anmong 18-fund managers / CIOs, who between them manage over Rs108bn in assets.

Economy:
The view on the economy continues to remain positive but moderated over the month.

  • 72 per cent of respondents expect a stronger economy and 28 per cent expect it to remain stable.
  • No respondent expects a weaker economy.
  • 61 per cent of fund managers expect inflation to ease, though the central bank has indicated otherwise.
  • 28 per cent expect inflation to stabilise
  • Only 11 per cent expect inflation to rise.
Rupee
  • Views on the strength of the rupee are moderated though 56 per cent still expected the rupee to appreciate against the USD.
  • 28 per cent expected the rupee to be stable and 17 per cent expect the rupee to depreciate against the USD.

Credit Spreads
The recent widening of credit spreads in December saw sentiment shift towards steady spreads in the short-term. Only 6 per cent of the respondents expect compression in spreads in the short term.

Views over the long term were steady and the consensus expected a widening of spreads as more corporates borrow given the increased investment activity and about a fourth (28 per cent) of fund managers expected spreads to remain steady. No fund manager expected spreads to compress.

Returns
Fund managers chose floating rate funds as their most preferred category from a returns perspective for both the short-term as well as the long-term. Following a distant second, as most preferred was long-term gilt funds, likely expecting to capture trading moves in a range-bound market. Short-term debt funds were the second most preferred category, both in the short-term and the long-term.

Portfolio Strategy
In the income fund category, fund managers were equally divided in views to reduce duration or keep duration stable (39 per cent) and only 11 per cent said that they would increase duration. They plan to decrease bond allocation (44 per cent), keep gilt allocation stable (33 per cent) and increase cash allocation (50 per cent) indicating some unwinding interest. In the gilt fund category fund managers preferred keeping duration stable (39 per cent) as well as gilt allocation stable (44 per cent).

Gilts:
They were asked at what levels they expected the 10-year to rally to in 2005. The choices were 'Below 6 per cent', 'Between 6.01-6.50 per cent' and 'Between 6.51-7.00 per cent'.

The consensus did expect a rally in gilts responding with 'Between 6.01-6.50 per cent'.

16 of the 17 responses (94 per cent) expect gilts to rally to the 6-6.50 per cent band and one fund manager expects a larger rally taking the 10-year gilt yield below 6.00 per cent. No fund manager expects yields to trade in the current range through 2005.

Markets:
The sharp rally in the gilt markets in December is likely triggered the change in view. Views were evenly balanced and the consensus favoured a stable market. However, there was a marked increase in bearishness over the month as the bulls fell from 50 per cent to 28 per cent and this was compensated by the increase in the bearish outlook.

Noticeably, the long-term outlook continued to deteriorate during the month. The bearish view has climbed sharply and more than half the fund managers (56 per cent) expect gilts to weaken over the year. The changing global and local dynamics largely contribute to this view.

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DSP Merrill Lynch fund managers survey reveals continuing optimism