Fund managers shed pessimism at record rate

Economic optimism among fund managers registered its largest increase yet in March, according to a survey published yesterday which illustrates the dramatic pick-up in sentiment in the past six months.

The survey of UK fund managers, by Merrill Lynch investment bank, presents the first signs that City analysts are planning to raise their forecasts for GDP, which will take some of the pressure off Gordon Brown as he delivers his budget this afternoon.

Mr Brown has been criticised by the City for being too optimistic about the state of the economy, but analysts at Merrill Lynch said yesterday the survey should give the Chancellor 'a sense of satisfaction'.

Ian Stewart, UK economist at Merrill Lynch, said he now expected to increase his forecast for GDP growth from 0.8 per cent to around 1 per cent after today's Budget.

Mr Stewart, whose forecast is already higher than the 0.5 per cent consensus estimate, said the Chancellor got a 'lot of stick' for his pre-Budget forecast of 1 to 1.5 per cent GDP growth and was accused of 'unfounded optimism'.

However, the rapid two percentage point fall in interest rates from 7.5 per cent last October and an overall improvement in the world economy appeared to be having the desired effect on influential City fund managers.

The monthly survey found that in March 67 per cent of fund managers expected a stronger economy on a year's view, compared with 33 per cent last month - the largest monthly increase in optimism since the study began in July 1990.

March's survey is a stark contrast to September when economic optimism hit a record low of 3 per cent amid market turbulence after Russia defaulted on debt repayments.

Reflecting their new-found optimism, fund managers are expecting companies' earnings to rise by 2.9 per cent in 1999, an improvement on the 0.8 per cent they were forecasting in January. As a result, fund managers are starting to become more interested in cyclical stocks,which were out of favour during last year's market rout, instead of growth stocks, as well as shares in smaller companies and property. Next year, fund managers expect earnings to grow at 6.5 per cent.

Fund managers are forecasting a 1.2 per cent rise in GDP, more optimistic than City analysts but still below the trend rate of 2.25 per cent.

• Only 53 per cent of British fund managers believe it is 'economically desirable' for the country to join Europe's single currency, according to the Merrill Lynch survey, the first to be conducted since the Prime Minister, Tony Blair, outlined his plans to prepare for the euro.

Despite the weak level of support, which puzzled the analyst at the investment bank, 83 per cent of fund managers surveyed expect Britain to join, probably in 2002.

The last such survey, in November, found 61 per cent of fund managers supported the euro.

Merrill had expected the figure to be higher this time. While the survey did not ask fund managers to explain their responses, possible reasons include conflicts between politicians and the European Central Bank and the weakness of the euro, contrary to expectations.

The survey concided with an NOP poll which showed that almost nine out 10 analysts believe Britain will eventually join the euro.