Investors becoming fearful of stagflation: poll

By Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - Investors have become increasingly concerned about stagflation over the past month, cutting back on equities and snubbing bonds in the face of slowing growth and rising prices, a survey showed on Wednesday.

Investment bank Merrill Lynch said its monthly poll of 204 fund managers across the world showed some of the most negative stances on equities it has seen in 10 years.

The main shift, the bank said, was in a view that global growth and profit expectations were falling just as expectations of higher interest rates were rising because of inflation.

"About 87 percent (of respondents) believe we are in a world of above-trend inflation and below-trend growth," said David Bowers, Merrill's poll consultant.

"People now believe we are in a world that is not only slowing but where short rates are rising," he said.

The poll was taken during a period in which both the U.S. Federal Reserve and European Central Bank warned about inflation and hinted that interest rates were likely to stay unchanged or be raised despite slowing economies.

Specifically, 75 percent of fund managers in Merrill's June poll said they believed the world economy would slow over the next 12 months, compared with 61 percent in May.

The same percentage said corporate profits would deteriorate, a small increase from May, while 59 percent said global inflation would be higher compared with 53 percent in May and just 44 percent in June.

This mood translated into a highly cautious approach to investments.

Those saying they were overweight in cash, for example, jumped to 51 percent from 42 percent a month earlier. Cash is often the first port of call for worried investors.

The fund managers, meanwhile, cut back sharply on equities. Some 50 percent said they were underweight in stocks, compared with 35 percent in May.

"This is one of the most negative stances on equities that we have seen in the last 10 years," Bowers said, referring to the gap between overweight and underweight positioning.

Bonds, however, remained deeply out of favor as would be expected in a climate of rising inflation.

Only 19 percent of respondents were overweight, down from 22 percent in May.

EUROPE GLOOM

Merrill noted that Europe, including Britain, had taken the brunt of the gloom, moving over 12 months from the most favored region to the least favored for equities.

The survey showed 42 percent of respondents were overweight emerging market stocks, 37 percent U.S. stocks and 26 percent Japanese stocks with 24 percent favoring euro zone stocks and only 10 percent favoring Britain.

In currencies and commodities, the U.S. dollar was seen as the most undervalued, by 66 percent, and the euro the most overvalued, by 74 percent.

Oil was seen as too pricey by 66 percent while gold was seen as overvalued by 34 percent.