Funds fear further market falls

EUROPEAN FUND managers fear further market falls and believe interest rates should be cut to help ease the global crisis, according to a survey by Merrill Lynch/Gallup of Continental European fund managers.

It reveals sharp falls in optimism about European economic prospects and warns that a credit crunch could be on the way.

David Bowers, European equity strategist at Merrill Lynch, said: "No- one dares to be bullish, everyone wants to protect themselves against any downside.

"The resulting credit contraction, caused by banks' and investors' unwillingness to lend money to all but the safest borrowers, might lead to a deterioration of fundamentals and slower growth."

Investors are most optimistic about the prospects for UK stock markets - partially due to last week's interest rate cut - and are particularly nervous about the outlook for Continental European markets and East Asia.

"The UK is outperforming because a lot of bad news has already been discounted and, as a result, there was less optimism to deflate than in other markets," said Mr Bowers.

Fund managers are increasing their cash holdings - 61 per cent have increased cash above normal - providing further evidence of investor nerves.

Merrill Lynch says 31 per cent of managers surveyed forecast a European slowdown within 12 months, compared to 22 per cent of respondents last month who thought economic conditions would improve.

Only 5 per cent of managers were optimistic about European corporate profits, compared to 44 per cent in September.

Fund managers are particularly nervous about the banks, which have been badly hit by recent market turmoil. "The banks' leadership of the markets is finished," said Mr Bowers.

Separately, the Institute of Directors called for further reductions in interest rates - which were cut last week by 0.25 points to 7.25 per cent - after its latest survey revealed a continued downturn in consumer confidence.

According to the IoD, pay pressures in the economy are now relatively benign, with 69 per cent of wage settlements surveyed falling in the 2 per cent to 5 per cent range.

Ruth Lea, head of the IoD policy unit, said: "The deterioration in confidence is such that we need a further quarter point cut in interest rates."

In the IoD survey, just 2 per cent of respondents thought prospects had improved over the quarter. Order books deteriorated sharply, with just 5 per cent of companies saying orders were above normal, compared to 17 per cent last quarter.