Merrill survey tempers Street

Fund managers more bullish on Vietnam and Pakistan stock markets.

The domestic equity market, which gained 50 per cent in calendar year 2006, is now the least favoured in the region, according to Merrill Lynch's latest survey. A total of 140 fund managers across the globe, including 20 from the Asia-Pacific, participated in the survey.

What is worse is that fund managers now prefer frontier markets such as Vietnam and Pakistan over India, the only Asian market where foreign investors sold equities last month.

"Fund managers tell us that they want to add more exposure to frontier markets such as Vietnam and Pakistan," the survey stated.

Fund managers feel Asian equities have been more expensive than before since the survey began in 2001. 
 

THE RANKINGS
Australia	-11
Hong Kong	5
China	-8
India	-16
Indonesia	-11
South Korea	2
Malaysia	10
Taiwan	25
Singapore	15
Philippines	0
Thailand	-3
New Zealand	-8
+ overweight, - underweight Source: Merrill Lynch

Merrill Lynch's economic team expects inflation and further (monetary) tightening in India this year, but among the 12 markets in the Asia-Pacific region (ex-Japan), the country (-16 grade) was the most underweighted market, followed by Indonesia and Australia (-11 each).

China too slipped from 'overweight' to 'underweight' in a month, from +3 in January to -8 in February. At present, the most preferred markets are Taiwan (+25), Singapore (+15) and Malaysia (+10).

The ratings were given by fund managers responding to a query: 'Thinking about country rotation over the next 12 months, which equity market would you overweight, and which would you underweight?'

The market specialists have increased their preference for banks, materials and general industrials, at the expense of telecommunications and consumer staples.

Banks moved suddenly from 'underweight' to this month's most favoured sector. The energy sector also rebounded from last month's lows, in tandem with rising oil prices, the Merrill Lynch report said.

Within the region, the most notable shift was from China to other North Asian markets, as investors anticipate further Chinese tightening measures after the lunar New Year.

Both Korea and Taiwan recorded more than $1 billion in foreign net inflows last month. Taiwan is now fund managers' favourite market in the region.

The survey said investors had reduced their preference towards strong markets such as Indonesia and Singapore and instead put $620 million into Southeast Asia's big laggard, Thailand.