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Europe deflation risk seen by 74% in global investor poll

LiveMint logoLiveMint 12-05-2014 Rich Miller

Washington: Financial professionals are optimistic about the global economy, just not as fervent about it as they were at the start of the year. That’s the message from the latest Bloomberg markets global investor poll, which shows concern about risks ranging from the turmoil in Ukraine to the threat of deflation in Europe.

40% of respondents in the survey of Bloomberg customers say the global economy is improving, another 43% say it’s stable, and only 12% say it’s deteriorating. Still, the enthusiasm has cooled: 59% thought the economy was improving in the last edition of the poll, in January; that was the highest reading since the world emerged from recession in 2009.

“I wouldn’t say investors are nervous, but they’re sceptical,” says Jack Ablin, who helps manage $66 billion in assets as chief investment officer of BMO Private Bank in Chicago.

The poll, conducted quarterly since late 2009, samples the opinions of traders, bankers and money managers who subscribe to the Bloomberg professional service. Selzer and Co. of Des Moines, Iowa, collected responses from 594 customers from 22 to 24 April. The poll has a margin of error of plus or minus 4 percentage points and is weighted to reflect the global distribution of Bloomberg users.

US favoured

When it comes to predicting the course of economies and markets in the poll, Bloomberg customers have had some successes. They turned optimistic about the US in January 2012, amid concerns about the effect on growth of a set of tax increases. They soured on the BRIC countries—Brazil, Russia, India and China—in early 2011, as those stock markets began to slide. They got bullish on stocks at the beginning of 2013, a year that saw the MSCI World Index rise 24%.

In the latest poll, appearing in the June issue of Bloomberg Markets magazine, investors view the US as the world’s bright spot, with close to two-thirds describing the largest economy as improving. That jibes with the forecast of the International Monetary Fund (IMF) in its World Economic Outlook in April that US growth will accelerate to 2.8% this year and 3% in 2015, up from 1.9% last year.

On the question of which one or two markets offer the best investment opportunities over the next 12 months, the US comes out on top, with 44%. Investors continue to endorse the recovery in the European Union (EU), which is in second place, at 32%. That’s a far cry from the low of 7% for the region in November 2010, when the euro-zone sovereign-debt crisis was getting worse.

Deflation risk

Poll respondents, however, are overwhelmingly concerned about deflation in the euro zone. About three quarters of them say it’s a greater threat to the region than inflation. Some individual countries such as Portugal have already experienced deflation this year, and the inflation rate in the 18-nation bloc as a whole was 0.7% in April, which is about one-third of the European Central Bank target of just under 2%.

“One reason to like European stocks is that they’re cheap, relatively speaking,” according to Russ Koesterich, chief investment strategist at New York-based BlackRock Inc., which manages $4.3 trillion in assets. “Most of the motivation is the valuation,” he says. Koesterich recognizes the growing caution the poll reveals. “People can still be overweight stocks and use the opportunity to raise a little cash, given the fact that there are some risks out there and stocks are no longer so cheap,” he says.

Japan, China

Investors are nervous about Asia’s two largest economies. There’s growing doubt about Japan’s turnaround. Only 13% say the country is among the best places to invest during the coming year, which is a decline from 23% in January and 33% in May 2013, when excitement about Abenomics was running high.

And poll participants say China’s economy is in its worst shape since September 2012. 9% say its economy is improving, while 47% say it’s deteriorating, and 41% view it as stable. Corruption and a troubled financial industry top the list of issues that investors say Chinese leaders need to address.

The one country that fares less well than China among Bloomberg customers right now is Russia. Asked to select the worst investment opportunities from among eight of the world’s large economies, 56% go with Russia. That’s the second-highest number for any country or region on this question since the poll was first run in October 2009.

Putin, Hollande

More than seven in 10 of those polled say Russia’s economy is weakening, and 45% recommend selling Russian assets in light of the conflict in Ukraine, which has prompted US and EU sanctions. 75% say they’re pessimistic about how Vladimir Putin’s policies affect the investment climate.

While investor sentiment about Putin is resoundingly bad, one leader scores even lower. France’s Francois Hollande, who has fought to boost taxes on high earners, garnered an optimistic vote of 11%; the figure for Putin was 15%. The most popular leader is Germany’s Angela Merkel, about whom 76% of respondents were optimistic.

Prime Minister Antonis Samaras of Greece, which sold bonds to investors in April for the first time since 2010, got a 37% optimistic score.

Close to one in five poll participants name UK markets as among the most attractive. Fuelled by consumer spending and a London housing boom, Britain will grow faster than any other Group of Seven economy this year at 2.9%, according to IMF.

UK rebounding

“The UK economy is proving pretty robust,” says Andrew Sentance, a former Bank of England official who’s now a senior economic adviser to PricewaterhouseCoopers Llp. “It’s hard to find an economic indicator that looks weak.”

Equities are the asset of choice in the current edition, with 46% saying stocks will offer the best return over the coming year. Still, that’s down from the 53% who chose stocks in the January survey and is the lowest that the tally for equities has been since November 2012. Investors were clear that internet and social media shares have climbed too far: 50% say they are in a bubble and another 36% say they are on the verge.

Poll respondents offer surprising criticism of their own industry. On a question about the fairness of various markets, 49% say the setting of the London inter-bank offered rate is rigged. 38% say stock trading is rigged against the average investor, versus 44% who say it isn’t. Asked whether a young person should pursue a career in finance, 41% say to do it; 36% say don’t do it.

Fed tightening

One event cooling investors’ ardour for stocks—and bonds too—is the US Federal Reserve’s curtailment of its ultra easy monetary stance. Some three quarters of those surveyed see the US central bank raising interest rates by the end of next year. More specifically, 19% expect increases to start in the first quarter, and 20% predict the second quarter.

Bloomberg subscribers, for the most part, like what they see among the world’s leading central bankers, including Fed chairperson Janet Yellen, who took office in February. Some 66% of poll respondents have a favourable view of her, compared with 20% unfavourable. Her approval rating was 60% in the September 2013 poll, when she was in the running for the chairman job but not yet nominated.

In Japan, central bank governor Haruhiko Kuroda’s approval has eroded to 56% favourable from 64% a year earlier. Japan raised sales taxes in April for the first time in 17 years as prime minister Shinzo Abe pressed ahead with plans to revitalize the economy and repair the government’s finances.

Abe fever over

54% of survey respondents say they’re optimistic about the impact of Abe’s policies on investment. While that’s almost twice the percentage who are pessimistic, it matches Abe’s lowest favourable rating since he became prime minister in December 2012.

“Expectations were too high for Abenomics among global investors,” says Shuichi Obata, a Tokyo-based senior economist at Nomura Securities Co. “There won’t be anything that will reinstitute Abe fever. The Abenomics festival is already over.”

So as the cheers for Japan’s turnaround fade, the enthusiasm for the US and Europe persists in the Bloomberg Markets Global Investor Poll—even if investors have taken it down a notch from three months earlier. Bloomberg

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