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Extreme Reaction on Re-evaluation of EU and China Risk
Investors are positioning themselves for halts in both Europe and China's economic recovery, according to the BofA Merrill Lynch Survey of Fund Managers for February.
Investors have scaled back their growth expectations, retreated into cash and are increasingly skeptical that the European Central Bank (ECB) will increase interest rates in 2010. The panel was responding to questions against a backdrop of economic crisis in peripheral eurozone countries and concerns over monetary tightening in China. World equity markets fell by 8.9 percent during the survey period.
The proportion of European investors expecting the region's economy to grow in the coming 12 months has fallen to 51 percent from 74 percent in January, and the proportion expecting no rate rise by the ECB in 2010 has soared to 45 percent from 19 percent. Globally, 42 percent of respondents now see no rate hike by the U.S. Federal Reserve before 2011, up from 27 percent.
Risk aversion returned with average global cash balances rising to 4.0 percent from 3.4 percent in January. Hedge funds have scaled back leveraged to less than one times from 1.33 times. Europeans poured out of financial stocks amid fears of exposure to troubled economies. Global investors now say Europe is the region they would most like to underweight.
"Investors are questioning whether this is a pause in growth or a trend reversal. We believe it's the former," said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research. "Concern over European sovereign debt and Chinese tightening means the level of U.S. dollar bulls is at a 10-year high, and banks are once again the least loved global sector," said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Global Research.
Concerns prompt asset re-allocation
The starkest monthly change has been a shift back into cash. A net 12 percent of global asset allocators are overweight cash, the highest since June 2009 and in contrast to a net 8 percent underweight in January.
Equity positions are sharply down. A net 33 percent say they are overweight equities, down from a net 52 percent in January. There's been a moderate move back towards bonds. A net 39 percent of asset allocators are underweight bonds, down from a net 52 percent a month earlier. Nonetheless investors still prefer growth sectors such as tech, energy and industrials.
Commodities, dependent on Chinese demand, have fallen in popularity with a net 10 percent of global investors overweight the asset class, down from a net 23 percent. However, following a 9 percent fall in the oil price, during the survey period, a net 18 percent now see crude as undervalued.
Fears surface over Chinese growth
Belief in China's continued economic growth has fallen at the fastest rate ever recorded by the survey. Just 7 percent (net) of the global panel expect China's economy to strengthen in the coming 12 months down from a net 51 percent of respondents a month earlier and the lowest reading since March 2009. This turnaround followed the decision to increase Chinese banks' reserve ratio requirements.
"At least in terms of investor growth expectations, China has experienced a 'double-dip'," said Michael Hartnett.
Banks take brunt of equity sell-off in Europe
European investors responding to the BofA Merrill Lynch Survey of Fund Managers have dramatically reduced exposure to banks in the past month.
More than half of respondents (53 percent) are underweight bank stocks compared with 16 percent in January, a monthly swing of 37 percent and the highest underweight since March 2009. Even after the sell-off a net 14 percent of the regional panel believes banks are overvalued.
"What's happened in Greece has prompted questions about banks' lending positions and exposure to other peripheral economies. There's also a fear that banks' cost of capital will rise," said Gary Baker. The banking sell off was concentrated in Europe, however. U.S. investors actually reduced their underweight positions. A net 24 percent are underweight banks, down from a net 38 percent in January.
Survey of Fund Managers
A total of 200 fund managers, managing a total of US$502 billion, participated in the global survey from 5 February to 11 February. A total of 165 managers, managing US$355 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.
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