Emerging market allocations ‘collapse’ as China fears deepen

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Asset allocators’ emerging market holdings are now at their lowest level since December 2008 as a Chinese hard landing becomes their greatest fear, Bank of America Merrill Lynch says.

The BofA ML Fund Manager Survey shows that allocations to emerging markets “collapsed” during June as investors took a net 9 per cent underweight to the region. Just four months ago, a net 43 per cent of fund managers had an emerging market overweight.

A net 25 per cent of global respondents to the survey added that emerging markets are the region they are most likely to underweight over the coming 12 months.

Furthermore, weightings to commodities fell to their lowest on record with a net 32 per cent of managers taking an underweight.

The shift comes as global fund managers rated a so-called hard landing in China as their top tail risk. Some 32 per cent of investors cited a Chinese hard landing and commodity collapse as their biggest fear, followed by the failure of ‘Abenomics’ in Japan at 21 per cent.

But the survey adds that such bearish sentiment towards emerging market has historically coincided with the
outperformance of the region against developed markets.

BofA ML Global Research chief investment strategist Michael Hartnett says: “The biggest contrarian play in the market today is assets linked to China. The lows in emerging market equity and commodity allocations suggest the market has over-positioned itself for a shock from China.”

Looking at individual markets, Indonesia and India were hit by the greatest swing in sentiment during June with both countries moving from a net overweight to an underweight. Exposure to Thailand and Turkey was also “significantly reduced”.

Despite the hard landing fears, China sits alongside Russia as the joint most favoured country, while sentiment towards Korea improved “notably”.

The BofA ML Global Fund Manager Survey polled 248 panellists with combined assets under management of $708bn between 7 June and 13 June 2013.