China Losing to U.S. Among Investments of Choice in Global Poll

Jan. 21 (Bloomberg) -- Investors have turned bullish on the U.S. while tempering their enthusiasm for China as they worry about a market bubble there, according to a Bloomberg survey.

An overwhelming majority also see a government debt default on the horizon this year, according to a quarterly poll of investors and analysts who are Bloomberg subscribers. Greece is considered the riskiest government, followed by Argentina, Russia, Ireland, Portugal, Italy, Spain and Mexico.

Sentiment toward the U.S. investment climate has flipped in just three months. Almost six of 10 respondents are now optimistic about the U.S. while a majority held a pessimistic outlook in an October poll. A nine-month rally in U.S. stocks has pushed up the Standard & Poor’s 500 Index 68 percent through yesterday’s close.

“There appears to be a surge in interest in the U.S., and it’s in marked contrast to tepid attitudes only three months ago,” said Ann Selzer, the president of Selzer & Co., a Des Moines, Iowa-based polling firm that conducted the survey.

“American consumers are regaining confidence, and with that alone, there should be no impediments for current business to resume the growth of the past decade,” said poll respondent Drew Beatty, a commodity derivatives sales analyst with Wells Fargo & Co. in Dallas.

The number of U.S. investors who see their economy improving has steadily marched upward over the past two quarterly polls, more than doubling since July.

Tie With Brazil

China, the world’s fastest-growing major economy, is viewed as a bubble by 62 percent. About one-third of respondents said China offered the best investment opportunities over the coming year, almost tied for first place with the U.S. and Brazil, though down sharply from October, when 44 percent ranked China best.

This time, almost three out of 10 investors said China posed the greatest downside risk, ranking it the second-riskiest market behind the European Union.

“We think that China is producing and is building up inventories at a rate that no other country or region can follow at the moment,” said poll respondent Alcibiades Angelakis, head of marketing and research at EPIC Investments in Athens. “This cannot continue for a long time, and we fear that in the second half of this year things will slow down.”

Concerns over a potential bubble in China have been mounting. Hedge fund-investor James Chanos, president and founder of New York-based Kynikos Associates Ltd., one of the first investors to foresee the 2001 collapse of Houston-based energy company Enron Corp., has said China looks like “Dubai times 1,000 -- or worse.”

China Lending Limits

After new bank lending in China last year surged to a record 9.59 trillion yuan, banking regulator Liu Mingkang said in an interview yesterday that he has told some banks to limit lending and restrict overall credit growth to 7.5 trillion yuan.

China’s benchmark Shanghai Composite Index dropped 95.02 points, or 2.9 percent on concerns the nation’s central bank may raise interest rates. The index has lost 3.8 percent this year, making China the worst performer among the world’s 10 largest stock markets.

The fourth-quarter estimate of China’s gross domestic product scheduled for release today is projected to show an annual growth rate of 10.5 percent, according to the median forecast of economists surveyed by Bloomberg.

The quarterly Bloomberg Global Poll of investors, traders and analysts in six continents was conducted Jan. 19. It is based on interviews with a random sample of 873 Bloomberg subscribers, representing decision makers in markets, finance and economics. The poll has a margin of error of plus or minus 3.3 percentage points.

Global Optimism

Overall, market professionals in the poll are increasingly confident in the global economy, with a 43 percent plurality now viewing the international economic outlook as improving, up from 37 percent in October. The optimism cuts across all regions, with respondents in Asia, Europe and the U.S. alike saying the global situation is getting better.

The prospect of a strengthening global economy is reflected in poll respondents’ market analyses. Stocks are considered the most promising asset class over the coming year, followed closely by commodities. Bonds are judged likely to have the worst returns over the same period. Over the next six months, oil, copper, corn and soybean prices all are expected to rise.

Poll respondents said they expect monetary authorities to remain accommodating in the near future. Almost two-thirds of investors believe central banks in their country will hold their benchmark interest rates stable over the next six months and more than half expect overall short-term interest rates to vary little. Six of 10 predict long-term rates will rise.

U.S. Confidence

The rising confidence is most pronounced when it comes to the world’s largest economy. Investors, asked the one or two markets that offer the best opportunities this year, rate the U.S. in a statistical dead heat with some emerging markets: 30 percent chose the U.S., just behind China, 33 percent, and Brazil, 32 percent. Three months ago, the U.S. was a distant fourth, chosen by only 18 percent.

Poll respondents expect to see U.S. stocks continue to go up in the near term, with 42 percent forecasting a rise in the S&P 500 in the next six months, compared with 31 percent who expect a decline. A quarter of respondents expect the index to vary little.

‘Double-Digit Gains’

“Although the growth in the economy is likely to be relatively moderate in 2010, we think it will be accompanied by double-digit gains in corporate profits through 2011,” said poll respondent John Ryding, chief economist at RDQ Economics in New York.

Asked to assess potential perils to the U.S. economy during the next two years, seven of 10 rated persistently high unemployment and chronic budget deficits a big risk. Four of 10 rated higher taxes a major risk. No more than a quarter considered higher inflation, a plunge in the dollar or trade tensions with China to be big risks.

Respondents were evenly split on whether it is more important to stimulate job growth or reduce the deficit, with 48 percent choosing each option.

Investors expect declines in benchmark stock indexes for the European Union, Britain and Japan.

Sovereign Default

The risks this year in Europe are related to the potential of a sovereign default debt in the region “that could fully blow into a crisis that can impact the currency, equity and fixed-income markets,” said poll respondent Sivanesan Muthusamy, a senior vice president in funding and investments at Alliance Bank in Kuala Lumpur.

More than three-quarters of respondents believe a government debt default is likely this year, with 30 percent saying it is very likely.

Six of 10 rate Greece’s sovereign bonds highly risky. Behind Greece, Argentina’s government bonds were rated highly risky by 42 percent, followed by Russia, 34 percent; Ireland, 32 percent; Portugal, 28 percent; Italy, 21 percent; Spain, 20 percent; and Mexico, 19 percent. Only 3 percent rated U.S. Treasury bonds highly risky.

Greece’s deteriorating finances prompted Fitch Ratings, Moody’s Investors Service and Standard & Poor’s to cut the nation’s sovereign debt ratings last month, spurring a sell-off in its bonds. The country faces pressure from other European Union governments to tackle the crisis caused by a budget deficit more than four times the EU limit of 3 percent of gross domestic product.

‘Serious Problem’

International Monetary Fund Director Dominique Strauss-Kahn called Greece’s fiscal situation “a serious problem” in an interview with Bloomberg Television in Hong Kong yesterday, though he said he believes the euro zone will withstand the turmoil caused by Greece’s credit downgrade.

Greek bonds tumbled yesterday, pushing the two-year yield up by the most since before the country adopted the euro, on concern the government will struggle to sell the debt it needs to fund the European Union’s biggest deficit.

The two-year note yield jumped 56 basis points to 4.23 percent as of 6 p.m. in London. It earlier rose 89 basis points to 4.66 percent, the biggest gain since 1998. The 10-year bond yield climbed 25 basis points to 6.17 percent, with the premium investors demand to hold the debt instead of benchmark German bunds at 295 basis points, the most since March 13.

To see methodology and exact question wording, click on the attachment tab at the top of the story.