- Global Survey Assesses Readiness for the Year 2000 -
NEW YORK, July 20 /PRNewswire/ -- Potential reactions caused by fear of
the unknown -- rather than actual fixing of computer systems -- is emerging as
the main investor concern as the race to prepare for Y2K enters the home
stretch, according to a new Merrill Lynch Global Research Survey.
Merrill Lynch says there are really two Y2K problems. The first, that of
actually fixing systems, is apparently largely being solved. Even in the
emerging markets, information and awareness have improved markedly. The
second Y2K problem is based on what is feared: How serious do consumers (both
corporate and individual) think that the Y2K problem will be and will their
responses exacerbate or ameliorate the situation and affect fund flows?
"As the inevitability of 1 January 2000 draws closer and as media scrutiny
focuses on that date, we expect more actual fixing will get done but more
anxieties will arise," stated Jeanne G. Terrile, Director of Strategic
Research.
The new research study, "Y2K: Bulls, Bears or Bugs?" focuses on those
places where reality and expectation often collide: capital, credit and
financial markets and reevaluates the corporate sector.
The Economic Impact
Overall, spending on Y2K issues is likely to produce a more efficient
global system. Nevertheless, some investments in Y2K fixes produced little
economic return for companies -- they were simply a cost that had to be
incurred to stay in business. The good news is that those funds can now be
redirected to other information technology spending.
Merrill Lynch's economists, as well as many investors, anticipate a
buildup of inventory in the fourth quarter of 1999 as companies and consumers
indulge their fears and stockpile components and supplies. That could
accelerate second half GDP growth in both the U.S. and in the recovering
countries of Asia and Europe, which are big exporters to the U.S. The
corollary to that would be a modest slowing of economic growth in the first
quarter of 2000 as the inventory is worked off.
Merrill Lynch could also see a flight to quality in the bond market which
could also impact fourth quarter interest rates.
The Banking System and Funds Flow Issues
Because the banking system is both regulated and truly global, it has been
monitored by many regulatory agencies and looks ready. Yet, for example, in
the U.S. where depositors have not had to worry about the safety of their
money for more than 60 years, a recent Gallup Poll found that 42% of adults
expected ATM machines to fail in the new year. The Fed is putting an extra
$50 billion into circulation at year-end to accommodate possible cash
hoarding.
Banks are expected to come to the capital markets to raise funds in case
they face possible Y2K liquidity issues, a factor which itself may raise
depositors' anxiety issues.
The Fixed Income Survey
Fixed income investors are likely to take a more defensive posture in the
second half of this year. Merrill Lynch's survey indicates that many plan to
focus on liquidity and engage in some hedging (mostly by outright sales -- not
a true hedge) to address the potential event risk of Y2K, this despite the
absence of a consensus about any real credit or fixed income market problem.
Some expect the spreads for non-Y2K compliant issuers to widen later in
1999. Most investors expect the Y2K impact overall to be short lived and
result in about a 5 basis point spread widening in the fourth quarter.
The Fund Managers Survey
Compared to a year ago, fewer fund managers expect Y2K to negatively
impact growth and only 35% of those surveyed consider Y2K to be a significant
element in stock selection (the number is higher in Asia, lower in the U.S.
and UK.). In general, confidence about most geographic regions has increased,
although confidence in Y2K compliance in "other emerging economies" has
dropped sharply.
The Technology Survey
Almost 90% of large corporate technology buyers have become more confident
about their own Y2K compliance. The switch to the Euro currency last year has
increased confidence on the continent and vendors note the high level of new
systems installed in the Asian Tigers, though some vendors thought that Japan
might experience some problems.
The Global Research Directors' Surveys
The common theme throughout the Global Research Directors' surveys is: the
longer entities have been addressing Y2K issues the more confident they are of
meeting compliance deadlines.
In the United States, worries about Y2K are so few (the typical exception
-- the government) that it is beginning to look like the "Millennium shrug."
Companies in Australia and New Zealand report that they are on track and
even look forward to increased investor interest, in case nervous Southeast
Asian investors are seeking a safe haven. They also anticipate a big
post-2000 internet wave as IT resources are redirected to e-Commerce.
In Canada, the costs of compliance have risen somewhat but that may be
because compliance deadlines were moved forward from September to June 1999.
Small businesses have been surveyed and it was discovered that 83% of them
will be ready by 1 January.
In Asia Pacific, 80% of companies are confident of their own internal
compliance. The major focus of concern in the region is government-owned
utilities in Indonesia, Thailand and the Philippines where high debt service
requirements may have limited the amount those entities could spend to ensure
compliance. There is also anxiety about how well the billing and settlement
functions will perform, and as a result, some anticipate potential problems
with receivables in the first half of 2000.
In Japan, the big change over the past year has been the government's
increased efforts to enforce compliance. The government is, in fact,
overseeing the infrastructure compliance process and has set an
October-November deadline. Merrill Lynch analysts believe that at this stage
the available information is still too vague to form an investment strategy,
especially one for identifying the likely defaulters. Our analysts advise to
wait and see until more data is available in the September-November period.
Compliance statistics are improving every month in Europe, although some
share the universal fear of government and small company problems. Merger and
acquisition activity has accelerated in the region, which might not have
happened if companies were very worried about compliance.
Finally, in Latin America confidence is highest in Y2K readiness in
Argentina, Chile and Mexico. In some sectors, disclosure is poor so investors
may assume the worst. Even though we believe that Latin America will
successfully negotiate the millennium turnover, we suspect that a high level
of skepticism may influence investor attitudes and actions as we approach
year-end.
Conclusion
"The turn of the millennium is a big event which will surely get more and
more media coverage and some of that coverage will no doubt raise fears. The
famous Franklin D. Roosevelt quote, 'We have nothing to fear but fear itself'
is very applicable to the Y2K issue," said Rosemary T. Berkery and Andrew J.
Melnick, Directors of Global Securities Research and Economics. "To the
extent that those fears are acted upon, investment and funds flows could be
altered. To paraphrase one of our analysts in London: the costs of Y2K
failure could be very large but they must be measured against a probability
which is actually very small."
Merrill Lynch Global Securities Research and Economics has more than
700 analysts in 27 countries. Merrill Lynch is the only firm to place first
in five of the six "Institutional Investor" research team surveys (U.S.
Equity, U.S. Fixed Income, Latin America, Europe and Asia.) In addition, the
firm ranked first in "The Wall Street Journal" 1999 All-Star Analysts Survey,
and the 1998 "Financial News'" "Poll of Polls," a summary of nine equity
research surveys from around the world.
Copies of this study, the fifth in a series of special reports on
important topics for invest and our second on Y2K, are available in
traditional form and on the Internet at http://www.research.ml.com/Marketing/.
The Y2K study can be found beneath the Global Research Overview.
SOURCE Merrill Lynch & Co., Inc.
 back to top
Related links:
http://www.merrilllynch.com
Company News On-Call:
http://www.prnewswire.com/comp/555800.html or fax,
800-758-5804, ext. 555800
CONTACT:
Joanne Tutschek, 212-449-7278 or Susan
McCabe, 212-449-0389, both of Merrill Lynch
|
