Funds May Favor U.S. Stocks Over Asia, Merrill Says

By Chua Kong Ho

Nov. 6 (Bloomberg) -- Fund managers may favor U.S. stocks over Asian equities in coming months on expectation Barack Obama's administration will introduce measures to revive the world's largest economy, Merrill Lynch & Co. said.

The MSCI Asia Pacific Index has declined 40 percent this year, more than 37 percent for Europe's Dow Jones Stoxx 600 Index and the U.S. Standard & Poor's 500 Index's 35 percent drop. Stocks have fallen amid signs the credit crisis, which caused Bear Stearns Cos. and Lehman Brothers Holdings Inc. to collapse, had started to drag on the global economy.

``There's been a capital reallocation from Europe and Asia back to the U.S. and Obama will keep those fresh `overweight' positions on U.S. equities and dollar because of expectations of fiscal stimulus,'' said Mark Matthews, chief Asian strategist at Merrill Lynch in a phone interview from Hong Kong, where he is based. ``It's hard to see any significant direct impact for Asia from Obama's election.''

Matthews isn't making any changes to his investment recommendations with Obama's election as the next U.S. president. Obama won 52.3 percent of the popular vote to beat rival John McCain, the highest proportion since Republican George H. W. Bush's decisive win over Democrat Michael Dukakis in 1988.

Obama has urged Congress to pass a $175 billion economic stimulus bill immediately after the election, which includes checks for consumers, a tax credit for job creation and spending on public works such as school repairs, roads and bridges.

Fund Flows

U.S. equities received more than $26 billion in inflows during August and September, even as funds investing in Europe, Asia and emerging markets saw outflows in the third quarter, according to a Citigroup Inc. report today.

The International Monetary Fund projects the economies of the U.S., Japan and euro zone all will shrink next year in a simultaneous decline of the world's biggest industrial powers, according to a fund staffer who cited revised forecasts. A month ago, the IMF predicted all three would expand.

Matthews, who has worked previously worked for Standard Poor's and Nomura Holdings Inc., said in an Oct. 22 note that Asian equities outside Japan were close to reaching a floor as valuations plumb historic lows.

MSCI's Asian gauge that includes Japan ended the week through Oct. 24 valued at 8.9 times trailing earnings, the lowest since at least February 1995. The measure rallied 10 percent since then and is now valued at 10.5 times profit.

To contact the reporter responsible for this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net