Investors Get Bearish on S&P 500, Bullish on Japan, Survey Says

(Bloomberg) -- Investors predict the Standard & Poor’s 500 Index will fall from its highest level in seven months on concern the government’s economic rescue efforts may spur inflation and drive up interest rates, a survey of Bloomberg users showed.
After optimism about the U.S. stock index rose to a record in May, the monthly Bloomberg Professional Global Confidence Survey’s measure dropped 10 percent to 46.26 this month, below the threshold of 50 that divides sentiment between expectations for equity prices rising and falling in the next six months.
The survey’s 2,106 respondents also signaled changed outlook for stocks in Japan and Switzerland, turning from bearish to bullish on the Nikkei 225 and the Swiss Market Index. They grew more optimistic on the outlook for Brazil’s Bovespa and were less confident of gains for Mexico’s Bolsa.

Bloomberg users, surveyed from June 1 to June 5, expressed increased conviction that Germany’s DAX, France’s CAC 40 and Spain’s IBEX 35 would fall. Investors’ view of Italy’s FTSE MIB Index and the U.K.’s FTSE 100 improved, though they continued forecasting declines. “Investors are starting to question whether the support in the market is strong,” said Alberto Espelosin, who helps manage the equivalent of $10.5 billion at Zaragoza, Spain-based Ibercaja Gestion and participated in the survey. “Markets have some room to rise, but then they will stumble upon the huge deficits that governments are running into to rescue economies.”

Interest Rate Concern
In the U.S., traders are increasing bets that the $12.8 trillion pledged by the government and Federal Reserve to fight the recession will push consumer prices up, forcing the central bank to raise interest rates and slowing the recovery. Speculation the Fed will raise rates amid the highest unemployment since 1983 spurred concern that the S&P 500’s steepest rally since the 1930s will end. Confidence in U.S. stocks hit 51.6 in May, the most since the Bloomberg survey began in 2007.The S&P 500 climbed to the highest level since November on June 2, up 40 percent since March. That pushed its price-to- earnings ratio to 15.5, the most expensive in eight months. Since last week’s peak, the benchmark index for U.S. equities has fallen 0.2 percent to 942.43 points.

Lending Target
The U.S. central bank cut the target for its benchmark lending rate to as low as zero in December. Fed funds futures trading shows a 25 percent chance policy makers will raise the rate by September, compared with odds of 17 percent a week ago. The Bloomberg survey’s reading in Germany dropped 2.4 percent to 42.71. The DAX Index was valued at 26.7 times the earnings of its companies at the close of trading yesterday, near the highest in almost five years. Speculation that government measures and interest-rate cuts will help end the first global recession since World War II spurred the index’s 36 percent rebound from a four-year low on March 6.
The confidence measure lost 4.3 percent to 47.54 in France and 8.8 percent to 33.75 in Spain. Pessimism decreased in Italy, with the Bloomberg measure climbing 9.8 percent to 48.44, and in the U.K., where it rose 12 percent to 45.71.Investors turned bullish in Japan and Switzerland. Japan’s government on May 22 raised its assessment of the economy for the first time in almost three years and the nation’s industrial production increased in April by the most in 56 years.

Economy ‘Hit Bottom’
“The economy has hit bottom and people are hopeful it’s going to recover,” said Naoki Fujiwara, who oversees about $6.1 billion at Shinkin Asset Management Co. in Tokyo. The confidence measure rose 9.9 percent in Japan to 53.88 and 57 percent in Switzerland to 50.85.Bullishness on Brazil increased 3 percent to 64.52. The Bovespa index has climbed 42 percent this year on speculation record low interest rates and improved commodity demand will boost growth. Investors poured 6.08 billion reais ($3.1 billion) into Brazilian stocks in May, the biggest monthly inflow ever.
Respondents became less bullish on Mexico, where the index dropped 13 percent to 50.52. The nation’s economy will shrink 4.4 percent this year, according to the median estimate of economists surveyed by Bloomberg, dragged down by the global recession and the effects of swine flu.