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Fund managers modestly optimistic about near future

- Alan Lavine and Gail Liberman

Although stock prices are waffling, expect higher returns in the near future. So keep right on investing. Sectors that should perform well include energy and basic material industries.

That's the word from a number of mutual fund portfolio mangers. Of course, they could be wrong.

For the first time since March, most mutual fund managers are expecting a stronger world economy, says Merrill Lynch, New York.

Only a net 11 percent of fund managers expect corporate profits to deteriorate over the next year, versus one-third who took this view just two months ago. Half of some 288 mutual fund managers polled in Merrill Lynch's Survey of Fund Managers for August believe companies are under-investing in their businesses. And the number of fund managers who want cash to be returned to shareholders has been declining slightly.

"If higher investment spending gains the upper hand, this could lay the foundation for a more enduring economic recovery," says David Bowers, chief Global Investment strategist at Merrill Lynch.

However, expectations of higher economic growth come at the price of higher interest rate projections. August's poll shows a net 78 percent of fund managers expect short-term rates to rise over the next year, up from 61 percent who took this view in July. A net 71 percent see long-term rates rising, up from 57 percent last month.

Behind the rise in interest rate expectations lies a rekindling of inflationary fears. A net 60 percent of fund managers expect global core inflation to be higher one year from now--nearly three times the number who took this view just two months ago. At the same time, a net 16 percent of the panel sees commodity prices rising over the next year.

This month's Merrill Lynch survey shows a shift out of utilities, staples and bank stocks and into energy, basic materials and discretionary stocks. Global sector allocators report the biggest overweight of energy stocks and the largest underweight of bank stocks since the question was introduced in 2002.

A net 44 percent are underweight in U.S. stocks, while nearly half of respondents describe themselves as overweight in Eurozone stocks. Emerging market stocks also are in favor, with a net 42 percent overweight in the sector.

In the first poll since China's foreign exchange regime shift, investors predict a stronger economy and higher inflation. Only a net 4 percent expect China's economy to weaken over the next year.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).

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