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Fund managers focus on rates
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March 8, 1999: 5:20 p.m. ET
International managers think Fed funds rate going up; U.S. managers think down
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NEW YORK (CNNfn) - Short-term U.S. interest rates and the direction in which they might head remain major concerns for money managers at home and abroad, but their views differ widely according to a new survey by Merrill Lynch.
Most international money managers in the survey think the Federal Reserve, if and when it changes interest rates, is likely to opt for a tightening. But they also think the Fed is likely to leave rates unchanged for a while.
By contrast, most U.S. money managers surveyed think the Fed funds rate, the key short-term interest rate controlled by the Federal Reserve, is headed down, the study found.
Three-quarters of global managers expect to see an increase in the Fed funds rate, which measures the rate U.S. banks charge each other on overnight loans, according to the study, a monthly review Merrill Lynch commissions from the Gallup Organization to gauge the views of fund managers from around the world.
Still, most managers said falling commodity prices are easing inflation pressures and are likely to keep the Fed neutral on rates for awhile.
Japan recovery unlikely
In other findings, many fund managers said they do not expect Japan's economy to recover and they are doubtful about the Bank of Japan's efforts at reforms. However, some of them said they expect Tokyo to try to wiggle its way out of recession by accepting a weaker yen -- a scenario Japan already tried with mild success in 1995.
In the event Japan does recover, it will be worse for U.S. markets than a devaluation of China's currency, money managers seem to believe.
A devaluation in China would lower commodity prices further, and therefore ease U.S. inflation pressures even more -- a path that would at least keep interest rates stable over the near term.
Growth stocks lose favor
The survey shows that managers are losing their taste for growth stocks. Only 57 percent of the managers named growth stocks as their favorite sector, compared with 80 percent last month.
Interest in technology issues is also waning in favor of cyclical stocks, the survey found.
And U.S. fund managers seem to be selling Europe equities in favor of Asia stocks, including Japan, reversing a trend that started after the Asia crisis of 1997, according to the survey. 
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