Investors have returned from holidays with a defensive mindset but fresh hopes are emerging about China’s economic prospects, according to the BofA Merrill Lynch Survey of Fund Managers for September.
Sentiment over the Chinese economy has swung from significantly bearish to bullish in just one month. A net 11 percent of respondents believe that the Chinese economy will strengthen over the next 12 months – a 30 percent swing and the largest positive monthly change since May 2009. In August a net 19 percent said that China’s economy would weaken. In July a net 39 percent were bearish over China.
Investors within Global Emerging Markets (GEM) have backed sentiment with action, racing back into Chinese equities. A net 22 percent of the regional panel are overweight Chinese equities in September. In August a net 22 percent were underweight China. GEM has retained its status as the most favoured region for equities and has slightly extended its lead over the eurozone. Sentiment is broadly neutral towards the U.S., the eurozone and the U.K. while the panel has become more bearish towards Japan.
“Despite subdued risk appetite, two thirds of investors view European equities as cheap, the highest reading since February 2003. This offers scope for a rally should economic news improve,†said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Research. “Renewed optimism in Chinese economic growth provides some hope of an improvement in investor sentiment in the coming months. The question is whether China is a sufficient catalyst to spark a change,†said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Research.
Valuation gap between equity and bond markets reaches new high
Global investors are approaching the fourth quarter with a heightened sense of caution. One key signal of low risk appetite is large numbers of investors simultaneously saying that equities are undervalued and bonds are overvalued. The spread in perceived valuations of bonds and equities has ballooned to more than 100 points for the first time since the survey started measuring it in early 2003. A net 38 percent of the panel believe equities are undervalued while a net 68 percent believe bonds are overvalued.
Nonetheless asset allocators reduced their underweight positions in fixed income. A net 15 percent of asset allocators are underweight bonds in September, down from a net 23 percent in August.
Many more respondents have moved to overweight cash positions. A net 20 per cent of the panel was overweight cash this month, double the level in August. Average cash balances have risen to 4 percent of portfolios, up from 3.8 percent last month.
Global sector allocations highlight a more defensive approach. Asset allocators have sharply reduced their underweight positions in utilities. A net 11 percent of the panel is underweight the sector this month compared with a net 27 percent in August. More respondents are overweight pharmaceuticals than one month ago.
Allocators have scaled back positions in industrials and technology. A net 4 per cent of asset allocators are overweight industrials, down from a net 12 percent in August. The proportion of respondents overweight technology has fallen to a net 25 percent from a net 34 percent.
Gold, another safe haven, is perceived as increasingly overvalued at a time when it has been approaching a new record high. A net 19 percent of the global panel believed gold is overvalued compared with a net 12 percent in August.
Japan slips further behind
Faith in the Japanese market took a further knock in September’s survey. A net 20 percent of the global panel says that Japan is the region they would most like to underweight and the gap between it and the U.S., the second-least favoured destination, has widened. A net 32 percent are already underweight Japanese equities, compared with a net 11 percent in July.
Furthermore an increasing number are indicating that the yen should fall against major world currencies. An unprecedented net 72 percent believe that the yen is overvalued, and that number has been steadily increasing since June from a net 48 percent. Within Japan, confidence in the economy and in corporate earnings continues to weaken.
Survey of Fund Managers
A total of 215 fund managers, managing a total of US$579 billion, participated in the global survey from 2 September to 9 September. A total of 177 managers, managing US$382 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS. Through its international network in more than 50 countries, TNS provides market information services in over 80 countries to national and multi-national organizations. It is ranked as the fourth-largest market information group in the world.
The BofA Merrill Lynch Global Research franchise covers over 3,100 stocks globally and ranks in the top tier in many external surveys. Most recently, the group was named 2010 Top Global Broker (second consecutive year), Top Europe Broker, No. 2 U.S. Broker and No. 3 Asia broker by Financial Times/StarMine. The team was also named Best Brokerage by Forbes/Zacks for the second consecutive year. In addition, the group was named No. 1 in the 2010 Institutional Investor All-Emerging Europe Research team survey and the All-Latin America survey and No. 3 in the 2010 Institutional Investor All-Europe team survey for pan-European coverage.
