Fund managers take emerging market allocations to 12-year low

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Global investors continue to lose faith in the China growth story and have taken their exposure to emerging market equities down to a 12-year low.

July’s Bank of America Merrill Lynch Global Fund Manager Survey shows a net 65 per cent of asset allocators do not expect growth to strengthen in China in the near term. At the start of 2013, 67 per cent of fund managers thought Chinese growth would improve.

Official data published this week revealed that the Chinese economy expanded by 7.5 per cent in the second quarter, when compared to one year earlier. This is a fall from the 7.7 per cent recorded in the first quarter and brought further scrutiny on whether the world’s second largest economy will meet its growth target.

Fund managers rate a so-called hard landing in China and a subsequent commodity collapse as their biggest tail risk,with 52 per cent citing this as their largest concern. This is up from 32 per cent last month.

The report says: “Investors are showing extreme pessimism toward China and emerging market, with EM now seen as the greatest potential threat to financial market stability. A net 70 per cent of investors rated EM risks as ‘above normal’, the highest on record.”

The shift in sentiment has seen managers pull money out of emerging market equities. A net 18 per cent are now underweight the sector, which is the lowest since November 2001.

Despite the lack of confidence in emerging markets, investors have continued to move towards equities and away from bonds. Equity allocations have moved from a net 48 per cent overweight to 52 per cent overweight during the past month, while a net 55 per cent of managers are underweight bonds.

Overweights to Japanese equities, which are benefitting from the government’s ambitious stimulus plans, rose from a net 27 per cent to 17 per cent, while the allocation to US stocks has reached its highest since June last year.

BofA Merrill Lynch Global Research chief investment strategist Michael Hartnett says: “With the support of a host of buy signals in recent weeks, the ‘great rotation’ is in full force. Our positive view of equities would be further reinforced if the loss of faith in China’s growth story turns out to be overdone.”

The BofA ML Global Fund Manager Survey polled 238 panellists with combined assets under management of $643bn between 5 June and 11 July 2013.