LONDON -- For investment managers, Y2K investment strategy is now based on a four-letter word: fear.
The only macro-economic effect expected from Y2K is more related to the fear of computer failures than to actual system problems, a recent survey by Merrill Lynch & Co., London, shows.
Few money managers actually expect computer failures to affect the world economy in the early years of the next millennium. Only 26% anticipate infrastructure problems such as power cuts or telephone network shutdowns to be a drag on economic growth in the year 2000.
Some 16% foresee financial system liquidity problems resulting from the computer bug, while only 14% are concerned that Social Security payments will be late.
The Merrill study also shows that only one in 10 investment managers expect the widespread failure of electronic products to trigger a new consumer replacement cycle.
But while only a few expect computer failures, 35% see Y2K as a "significant issue" in their stock selection.
According to Trevor Greetham, global strategist at Merrill Lynch's London office, managers aren't sure how to factor in Y2K when analyzing a company. He believes they are seeing it as a random event they can't anticipate.
A year ago in a similar survey, most company executives told Merrill Lynch surveyors they thought they would be ready for Y2K, but were not sure of their suppliers' compliance.
And while most managers are expecting computer failures in emerging markets, Mr. Greetham said they should be watching the United States.
"The U.S. can be the place where more computers go wrong," he said, adding that since the United States has the most computer power in use, it only seems logical that more glitches will pop up.
An overwhelming 61% of managers disagree -- up from 34% a year ago. They expect companies in the emerging markets to be the least prepared for Y2K. Of the same group of 274 managers, only 3% said U.S. companies were the least prepared.
Two-thirds of money managers surveyed predict significant inventory stockpiling for the remainder of the year, which could boost global economic growth.
The "big psychological effect" of Y2K may be a plus for 1999, but may result in a slowdown in global growth in 2000 as emergency supplies are slowly depleted, Mr. Greetham said.
About 49% of managers see the computer bug as a positive impact on economic activity before Jan. 1., while 14% expect business to pick up after Jan. 1.
After U.S. companies have spent an estimated $80 billion to $100 billion on fixing computer glitches, about 37% of managers surveyed conclude that a drop in technology spending will put a damper on activity in 2000.
But regionally speaking, Asia and Europe may be the benefactors of increased business in 1999. Since there is a degree of spare capacity in those regions it is unlikely that any recession would occur. They are expected to pick up the slack in producing goods, in turn giving an extra boost to the ongoing economic recovery in those countries, according to the Merrill Lynch survey.
The firm is currently overweight in the Asian and European equity markets, which is not necessarily a decision related to Y2K, Mr. Greetham said.
The most risky place for inflation and possible recession to occur would be the United States, he said. With the current economic recipe consisting of low unemployment, low inflation and steady growth, the booming U.S. economy could quickly change with any triggering of price increases, according to Mr. Greetham.
He, like many others in the industry, doesn't buy Deutsche Morgan Grenfell Chief Economist Edward Yardeni's theory of a global recession stemming from a disruption in the supply of information caused by Y2K computer shutdowns.
"Currently, I believe there is a 70% chance of such a worldwide recession, which could last 12 months starting in January 2000 and could be as severe as the 1973-74 global recession," Mr. Yardeni wrote on his web page (www.yardeni.com).
The only way Mr. Yardeni's doomsday scenario may come to pass is if Y2K computer failures "lead to severe bottlenecks throughout the world economy" and -- along with rising inflation -- would keep central banks on the sidelines, Mr. Greetham said. This event he sees as highly unlikely.