Managers’ concerns shifting to commodities and China, BofA ML finds

Asset managers’ sentiment towards Europe improved last month, a keenly-watched survey suggests, despite Greece confirming massive debt restructuring.

The Bank of America Merrill Lynch (BofA ML) European Fund Manager Survey also shows that asset allocators are becoming increasing concerned by commodity prices and the health of the Chinese economy.

The survey finds that 38% of those polled regard European Union sovereign debt funding as the biggest tail risk during March.

Although this was investors’ largest concern of the month, it has fallen significantly from February when 59% of respondents cited European sovereign debt funding as the strongest risk.

Gary Baker, European equity strategist at BofA ML, says it is interesting how Greek confirmed a debt swap with the majority of its bondholders during March yet the markets were relative unmoved.

“LTRO has done an awful lot more than just kicking the can down the road”

Gary Baker

Baker claims the European Central Bank’s €529.5 billion (£440.2 billion) liquidity injection into the banking system through its longer-term refinancing operation (LTRO) at the end of February is one of the drivers of this improving sentiment.

“That’s testament to the fact that two years have been bought to allow banks to write down their exposure to Greek debt,” he says.

“LTRO has done an awful lot more than just kicking the can down the road – it arguably prevented a catastrophe in the short term and enabled banks to fund themselves. I think it’s more of game changer… than a can-kicking exercise.” (article continues below)

BofA ML’s survey shows that commodity price inflation has emerged as the second largest tail risk for asset allocators. In February, about 4% of fund managers highlighted this risk, but 16% flagged it in March’s poll.

Baker says investors view oil especially as being “very overvalued”. Brent has been pushed persistently above the $120 a barrel mark recently and is expected to remain at a high price in the coming months.

China was also found to be a growing concern among managers. Some 14% said the Chinese real estate market is the largest risk in this month’s survey, growing from 10% in February.

“If you look across the globe, you’ve got broad-based improvement and recovery in pretty much every region apart from China,” Baker adds. “There’s some ambivalence on what the prospects for the Chinese economy are.”