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Allocation to emerging market (EMs) equities hit its lowest level since 2001 with a net 32 per cent of fund managers globally now under-weight emerging markets, suggests the latest Bank of America-Merrill Lynch Fund Manager survey for August.
Geographically, more investors now want to be underweight on Global Emerging Markets (GEMs) and remain overweight on Europe (net 48 per cent of global fund managers intend to over-weight Europe), followed by Japan (net 40 per cent overweight Japanese equities, up three percentage points).
Fund managers, according to the survey, are less optimistic about the outlook for the global economy, with 53 per cent of the investors expecting the global economy to strengthen as compared to 61 per cent in July.
One reason for this, probably China, with 52 per cent of the fund managers seeing Chinese recession as the greatest tail risk to global markets. Fears of a Euro zone breakdown have plummeted in August as the Greek situation resolves; only two per cent see it as the greatest risk, down from 26 per cent last month.
The survey findings show that a net 32 per cent of investors are underweight on EMs, which is the highest on record - higher than during China debt scare (March 2014), Lehman (December 2008) and Lula (October 2001).
“Two out of three investors think either the China recession or the EM debt crisis are biggest tail-risks. 48 per cent of investors now expect the US Fed to hike in the third quarter versus 39 per cent thinking the fourth quarter; only 10 per cent say 2016 or later,” survey findings show.
“Investors are sending a clear message that they are positioned for lower growth in China and EMs,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
An overall total of 202 panelists with $574 billion of assets under management (AUM) participated in the survey from August 7 to August 13. A total of 162 managers, managing $449 billion, participated in the global survey, while 100 managers, managing $224 billion, participated in the regional surveys.
India and China
The biggest driver, according to BofA-ML survey, behind the massive underweight position of global investors in GEMs is concerns about China’s growth prospects. About 71 per cent of survey participants think that China’s real GDP (gross domestic product) growth will trend down to below six per cent by 2018 and one-third think it will fall below five per cent.
Despite the 25 per cent drop since the June highs, two-thirds of investors continue to believe that the China-A share market remains in a ‘bubble’. They see poor earnings prospects, dislike commodities and expect a challenging macro environment amid a strengthening US dollar and potential higher bond yields in the EMs.
Despite the challenges, India and Taiwan continue to be favoured by Asia (ex-Japan) investors. However, investors are less positive on China equities and have reversed their massive underweight on Indonesia to a mild overweight. Investors continue to underweight Australia and have increased the underweight on Korea. Singapore has moved from mild overweight to a massive underweight.
“This should hardly come as a surprise, as the China H-share market cap forms a quarter of the EM market cap and China’s GDP is two-fifths of EM GDP. Moreover, growth prospects of several commodities-rich countries are closely linked with China’s business cycle. In addition, countries like Korea and Taiwan, the two major commodity consumer EMs, are also linked to China through their non-commodity exports,” the BofA-ML survey says.
