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'Meltdown pushes investors to emerging markets'

business Updated: Aug 17, 2007 15:20 IST

PTI
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The US subprime crisis may have spilled over to the worldwide equity markets, but all is not lost for India with a new survey of fund managers from across the world indicating a major shift toward emerging markets.

While fund managers have turned more risk averse in light of the global market instability, they believe equities still offer value, especially relative to bonds, according to Merrill Lynch's Fund Managers Survey for August.

The survey indicated a shift away from the US with 29 per cent of respondents saying emerging markets offered best corporate profit outlook of all regions, overtaking the Eurozone which has been the favoured region throughout 2007.

Although the survey did not specifically mention India, the country is one of the main emerging economies globally. The country's stock market benchmark Sensex, however, has fallen in line with the global trend in the past few days.

Merrill Lynch said investors believed that quality of earnings in emerging markets, while a concern, was improving although it was deteriorating in the US.

Besides, the managers said that valuations were seen as more attractive and fewer respondents believed emerging market equities to be the most overvalued. "Only a net 8 per cent hold that view, while a net 19 per cent see the US as the most overvalued region," it said.

In the broadest snapshot of global institutional investor sentiment since sharp rises in credit spreads and equity market volatility, 11 per cent still regarded equities as undervalued, while 41 per cent thought bonds are overvalued.

A total of 181 fund managers, managing a total of $599 billion, participated in the global survey from August 2 to August 9.

Noting that emerging markets are riding out the US turmoil, Merrill Lynch said fund managers consider the wider credit spreads as a problem centred in the US housing market and "believe that emerging markets are relatively appealing".

"Investors seem to be viewing this turmoil as a potential buying opportunity for equities. They appear unwilling to turn fundamentally bearish on equities so long as they believe the rest of the world can decouple from a vulnerable US economy," Merrill Lynch independent consultant David Bowers said.

Earlier last week, Standard & Poor's said in its global stock market review report that emerging market returns continued to outpace developed market returns in July.

According to S&P, emerging equity markets rose 4.53 per cent for the month versus a 2.02 per cent loss for developed equity markets. For the 12-month period ending in July, emerging markets gained 53.94 per cent, which was more than double the developed markets gain of 21.52 per cent.

Merrill Lynch said that at the global sector level, investors still prefer stocks positioned to gain from cyclical trends, despite a more cautious outlook for growth.

Investors, polled at the height of recent volatility, have increased their cash levels one percentage point to 4.4 per cent of their portfolio. They have trimmed expectations of corporate profits and expect global growth to slow. However, few (7 per cent) said a recession was likely in next one year.