Fund managers are still super-bullish on Russia, betting that the energy boom has life yet. A net 62pc are overweight oil and gas shares. The most hated trio are travel and leisure (-66), banks (-62) and property (-60).
Karen Olney, Merrill’s European equity strategist, said oil is nearing its cycle peak. “Is the trade too crowded? Probably. As long as fundamentals remain strong, we retain our overweight stance,” she said.
“The burning question is when to sell oil companies and move back to banks.
“We resist the temptation. The time is nearer when inflation rolls over, towards the end of this year and certainly into 2009.”
A record number (net 29pc) are now underweight on European equities; many have switched into cash as they wait for the European Central Bank to inflict punishment – ever more likely after eurozone inflation reached an all-time high of 3.7pc in May.
The ECB’s chief economist, Jurgen Stark, said yesterday that the price spike was a “cause for alarm”.
Mr Bowers said Europe is now facing a triple whammy as the downturn in global export markets combines with a strong euro and a monetary squeeze.
“Eurozone retail sales have been worse than in the US on a year-on-year basis and eurozone GDP growth has also been worse,” he said. “If you look at Spain and Italy, and even France, they are very weak.
“The Fed has eased dramatically, but the ECB hasn’t eased at all. It intends to tighten regardless of the consequences on growth. This is what is eating away at confidence in Europe,” he said.
Merrill Lynch said fund managers were belatedly adapting to a global inflation shock that poses a serious danger to asset prices, and risks setting off “civil protest” in Argentina, Indonesia, South Africa and the Gulf states.
As the new story unfolds, America is coming back into favour, emerging as a sort of safe haven in a fast-changing world where trusted institutions command a premium. Investors are quietly rotating back into Wall Street – despite a chorus of pessimists. A net 23pc are overweight US equities, the highest since August 2001.
The long awaited “decoupling” has begun.
The United States looks like the winner after all.
The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.
“A very nasty period is soon to be upon us – be prepared,” said Bob Janjuah, the bank’s credit strategist.
A report by the bank’s research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as “all the chickens come home to roost” from the excesses of the global boom, with contagion spreading across Europe and emerging markets.
Such a slide on world bourses would amount to one of the worst bear markets over the last century.
RBS said the iTraxx index of high-grade corporate bonds could soar to 130/150 while the “Crossover” index of lower grade corporate bonds could reach 650/700 in a renewed bout of panic on the debt markets.
“I do not think I can be much blunter. If you have to be in credit, focus on quality, short durations, non-cyclical defensive names.
“Cash is the key safe haven. This is about not losing your money, and not losing your job,” said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.
RBS expects Wall Street to rally a little further into early July before short-lived momentum from America’s fiscal boost begins to fizzle out, and the delayed effects of the oil spike inflict their damage.
“Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point,” he said.
US Federal Reserve and the European Central Bank both face a Hobson’s choice as workers start to lose their jobs in earnest and lenders cut off credit.
The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. “The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation,” he said.
“The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets,” he said.
Kit Jukes, RBS’s head of debt markets, said Europe would not be immune. “Economic weakness is spreading and the latest data on consumer demand and confidence are dire. The ECB is hell-bent on raising rates.
“The political fall-out could be substantial as finance ministers from the weaker economies rail at the ECB. Wider spreads between the German Bunds and peripheral markets seem assured,” he said.
Ultimately, the bank expects the oil price spike to subside as the more powerful force of debt deflation takes hold next year.
Undaunted by recent turbulence in the financial markets, Visa, the biggest credit-card network in the United States, said Monday that it would forge ahead with what would be the largest initial public stock offering in the nation’s history.
Visa plans to sell as much as $17.1 billion of stock in late March, following in the footsteps of its smaller rival MasterCard, which went public in May 2006.
Visa and MasterCard are prospering as Americans increasingly flex plastic, rather than use cash, to pay for just about everything. The companies have not been hurt by the credit crunch, because they do not actually make credit-card loans. They merely processes transactions for banks that do.
If all goes as planned, Visa’s offering would generate a windfall for thousands of its so-called member banks, which own the company. The largest gains would go many of the nation’s biggest banks, which have been stung by losses stemming from mortgage-linked investments.
“Visa will be able to tell its story, even in an uncertain market, because its story is a good one,” said David Robertson, publisher of The Nilson Report, a payment industry newsletter. “If investors think MasterCard is a good story, Visa looks like the same thing on a bigger scale.”
Visa plans to sell 406 million Class A shares for $37 to $42 a share, with just over half going to the public and the rest to Visa’s member banks.
The first $3 billion will be placed into a special account to cover outstanding antitrust and unfair-pricing claims brought by merchants. Visa will use some of the new money to streamline its operations, expand in fast-growing emerging markets and invest in new technology like systems that enable people to make card payments using cellular phones. But the bulk of the capital will end up in the bank’s coffers, from repurchasing stock from them.
Visa’s member banks can use the extra cash.
If Visa’s shares are valued at a midpoint price of $39.50, JPMorgan Chase, the company’s largest shareholder, would receive an estimated $1.1 billion for its stake. Bank of America would get about $545 million; National City would get about $380 million; and Citigroup, U.S. Bancorp, and Wells Fargo can each expect around $240 million or more.
“The credit crunch is pretty cyclical; the prospects for Visa are very strong long-term,” said Marc Abbey, the managing partner of First Annapolis, a consulting firm that works with many banks and payments companies. “I am sure it is convenient for them to have extraordinary gains at the same time they have extraordinary losses.”
Since going public nearly two years ago, MasterCard have soared 408 percent, closing at $198.45 on Monday. It now has a market value of $26 billion.
MasterCard’s successful IPO prompted Visa to move forward with owns plans to go public. Since October 2006, Visa has reorganized its sprawling management structure, bringing together all of its global operations with the exception of those in Europe. It has also hired Joseph Saunders, the former head of Providian Financial Corporation, as its chairman and chief executive, giving him a pay package worth $11.1 million in cash for 2007. Upon completion of the IPO, he is expected to receive an additional $11.5 million in stock and options, according to Equilar, a compensation research firm.
Visa transactions accounted for roughly 66 percent of all credit and debit card purchases in the United States in 2006, compared to about 26 percent for MasterCard, according to The Nilson Report data.
Growth in card transactions, the foundation of the companies’ businesses , has historically held up well, even when the economy and consumer spending slows.
“If you look back at the last recession, card transactions did not drop ? they took a dip in growth, but they didn’t fall below prior year,” Robertson said.
“There is no reason to think that growth in the United States is going to sink Visa’s boat,” he said. “Whatever lackluster growth in the U.S. should certainly be matched and exceeded by what occurs outside the U.S.”
The prospectus for the sale lays out a convoluted capital structure, with four classes of shares, including three which go to the banks. But the deal, which is underwritten by JPMorgan and Goldman Sachs, also raises potential conflicts for the banks underwriting the shares.
Both institutions have strong ties to the financial services industry. But JPMorgan is Visa’s largest shareholder and largest customer. It is a member of the bank syndicate that agreed to lend $3 billion to the company. And it could reap more than 1.1 billion in proceeds from the IPO
Goldman, meanwhile, will serve as the “qualified independent underwriter” in setting the price of the offering, according to public filings. Its independence is not deemed in question even though Suzanne Nora Johnson, a Visa director, used to be a vice chairman of Goldman Sachs.