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DSP Merrill Lynch fund managers survey reveals vigorous optimismnews
Our Corporate Bureau
24 December 2004
The latest quarterly fund manager survey, on the likely trends in the equity markets and macro-economy, and their sector preferences reveals continuing optimism. The bullishness in the markets expressed in the last survey  is expected to continue into 2005.

The economic outlook too has improved, as respondents expect the effect of the lower than normal monsoon to be more than neutralised by the stronger growth in other sectors. This is a marked departure in the pessimism, due to the initially truculent monsoons, reflected in its mid-year survey.

Highlights of the December 2004 survey: Growth & Monetary Outlook

  • GDP growth expectations for FY05 are converging to the 6-7 per cent band. Since the last survey, there has been a distinct upward revision of expectations, with some fund managers also looking at GDP growth ending the year between 7 per cent and 8 per cent. Our estimate for GDP at 6.2 per cent is in the consensus band.
  • Interest rates expectations have moderated significantly, given the sharp rise in yields from 5.75 per cent to 6.75 per cent, following the reverse repo rate hike to 4.75 per cent. No fund manager expects the 10-year yield to rise over 50bp. Around half the respondents expect yields to remain unchanged with over a third expecting yields to be lower.
  • Views on the INR / USD exchange rate have also veered to the strongest this fiscal. 87 per cent of the respondents believe that the rupee would appreciate against the US Dollar.

Corporate Profit Outlook Corporate profit growth projections have strengthened, in line with stronger GDP expectations and reduced global uncertainties.

  • 27 per cent of fund managers expect 10-20 per cent earnings growth (down from 82 per cent),
  • 73 per cent expecting over 20 per cent growth (up from 18 per cent) largely in line with our expectations of 20 per cent.
However, DSP Merrill Lynch believes that corporates are now probably at the peak of the earnings upgrade cycle.

Earnings outlook most favorable for:

  • Capital goods and engineering (infrastructure and investment demand) followed by Cement (growth theme again),
  • IT (despite rupee appreciation) and
  • Financials.
  • Oil & Gas For the first time.

A few fund managers (though a small fraction) believe that the market is over-valued. The number of fund managers who believe that the market is now 10-20 per cent over-valued is down to only 40 per cent with a majority (53 per cent) believing that markets are fairly valued.

Fund managers hold largely neutral cash positions but are relatively overweight cash since our last survey.

Investor Sentiment

  • Short-term bullishness among fund managers despite the indices at life highs. 69 per cent expect the market to trade between 6200-6499 over the next three months.
  • Long-term bullishness among fund managers is high and no one expects to see the Sensex below 6200.
  • A significant 64 per cent expect the Sensex to cross 7000,
  • 27 per cent of those polled expect the Sensex to be 6600-6999
  • 9 per cent expecting the Sensex to be 6200-6599.

Buy or sell? While most fund managers (87 per cent) would be buyers if the market corrects by 10 per cent, interestingly nearly half the fund managers (47 per cent) would sell if equity prices rose by 10 per cent. This is the highest percentage of fund managers wanting to sell on any sharp rise and ties in with the view that markets are looking fully valued.

The outlook on FII flows is unanimously positive, 47 per cent expect domestic flows to be positive with 20 per cent expecting outflows on profit booking.

Sectoral Preference

  • Fund managers are overweight on Cement, Capital goods & engineering.
  • Oil & Gas and FMCG continued to be the biggest underweight sectors. This is in line with our strategy recommendations.
  • IT continues to be an overweight sector, but DSP ML has seen a fall in the overweight position led by rising valuations and an appreciating rupee.
  • Autos is another sector that has slipped with fund managers no longer bullish. DSP ML is still overweight on the 4-wheelers, but underweight the 2-wheelers in the auto space.
  • The major change has been toward fund manager preference for the pharma sector. Fund managers have turned bullish on the sector probably post its sharp under-performance. DSP ML is neutral on the sector citing "expensive valuations."
also see : Merrill Lynch survey finds long term optimism from the markets
Merrill Lynch survey predicts shift in investments from equity to fixed income deposits
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DSP Merrill Lynch fund managers survey reveals vigorous optimism