$70 oil would slow global growth

The new tolerance for high oil prices has stabilized around $70 a barrel. That’s the average price money managers say oil would need to reach in 2006 before its effects would start showing up in the global economy.

The Merrill Lynch Survey of Fund Managers for December also found that institutional investors are confident that the United States will avoid a recession in the coming year. Of the 295 managers surveyed, 93% now say two consecutive quarters of negative real U.S. GDP growth in 2006 is fairly unlikely.

“Investors appear to be pretty positive about next year,” says David Bowers, chief global investment strategist at Merrill Lynch. “Risk appetite remains strong, cash levels are at a record low of 3.6% and investors have already discounted Fed Funds rising to 4.5%.”

The managers expect that the global economy will maintain its current momentum in 2006, as long as the price of oil remains below $69 per barrel. A “significant” minority believe the global economy could tolerate even higher prices — one in six said prices would need to rise to $80 on average before it would affect the global economy and corporate earnings.

Just because they think earnings are resilient however, doesn’t necessarily mean money managers expect things to take off, exactly, in the year to come. Only 2% of those surveyed expect the global economy to strengthen; 12% of the survey respondents say they believe worldwide corporate profits growth will deteriorate.

Overall the group, responsible for managing more than $940 billion US, say higher oil prices have inspired them to rethink commodity prices. In October and November only 1% said they expect commodity prices to be higher a year from now. That view has changed dramatically, with 16% now saying they expect commodity prices to move higher during the year.

They are also rethinking their U.S. equity weightings. The consensus decision to overweight Japanese equities at the expense of U.S. equities in 2005 may be starting to change. With Japanese indices hovering around five year highs, only 1% of respondents say they plan to increase their exposure to Japanese equities in the coming quarter, down from 18% in October. At the same time, 25% plan to increase their exposure to U.S. equities, up from just 3% in the previous quarter. Having said that, 32% of managers still say U.S. equities are overvalued.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com