Inflation-hit India, China lose sheen before investors

Inflation is taking heavy toll on India and China with investors shying away from the two Asian giants because of the soaring price rise scene.

Already there are talks about the high inflation rate affecting India and China’s economic growth with Indian finance minister expressing apprehensions on the rising crude prices.

While India blamed rising crude prices for its inflation, China is also finding it difficult to tackle the shooting up of inflation, which may touch 10% in both the countries soon.

According to reports, fund managers are pulling their money out of China and India at a record pace on mounting fears of inflation.

A survey of investors by Merrill Lynch said that Europe has become the most unpopular region, while Britain is still trapped in the doldrums.

Again, lured over the crude prices, investors are putting their money on oil now. Will the equity market fall be a boom for commodities? That is the question haunting many investors now.

But the big surprise is the sudden change in view on the emerging powers of Asia, as overheating and spiraling oil costs spoil the boom.

The exodus from China reached fever pitch this month as investors slashed their net weighting position to -58, down from -14 in May. The Shanghai bourse had already fallen by almost half since October.

India fell to -63 as investors took fright at the country’s budget and trade deficits.

The survey of 204 fund managers worldwide suggests that the love affair with emerging markets is going cold.

The net weighting was -63 for Chile, -47 for Taiwan, -37 for Korea and -32 for Poland.

Moreover, asset allocators have taken their most negative stance towards equities in a decade, with a net 27 per cent underweight the asset class in June.

Investors’ fears of stagflation have crystallised as they face up to the possibility that interest rates might have to rise as the global economy slows.

They have acted by reducing exposure to both equities and bonds and moving into cash. This month’s survey reflects a world where global growth and profit expectations are deteriorating.

According to experts, the market is waking up to the idea that global interest rates are too low, in fact they remain below inflation.

Asset allocators have already moved aggressively out of Eurozone equities. A record net 22 per cent said they are underweight — the most negative stance taken in the past 10 years.

Not only has the Eurozone the least favourable corporate profit outlook, but the quality of earnings has been slipping, too.

Amid these concerns, European fund managers have been moving into cash. A net 34 per cent of European investors said they were overweight cash in June’s regional survey, up from 3 per cent in April. Furthermore, a growing number recognises that higher interest rates are likely. In February, half of European respondents believed ECB monetary policy to be too restrictive. That number fell to a net 10 per cent this month.

The popularity gap between the booming oil industry and the beleaguered banking sector has reached unprecedented levels in the eyes of European investors.

A net 62 per cent of respondents are overweight Oil and Gas (up from a net 29 percent in April). At the other end of the spectrum, a net 62 percent are underweight Banks (up from a net 21 percent in April).

The credit crunch is losing its sting as the greatest single threat to financial market stability.

The net percentage of investors citing credit risk as the number one threat has fallen from 95 per cent three months ago to 81 per cent in June. But inflation is the fastest growing concern.

A total of 204 fund managers participated in the global survey from June 6 to June 12, managing a total of $718 billion. A total of 185 managers participated in the regional surveys, managing $454 billion.