Investors are Mounting a Speedy Retreat from Emerging Markets
By Hal M. Bundrick
NEW YORK (MainStreet)--Money managers are gaining confidence in the global economy and are moving investment exposure to Europe while they trim emerging market and Japanese equities, according to Bank of America Merrill Lynch's June fund manager survey.
Regardless of continued market volatility and a 2.5% monthly loss in world equities, a majority (56%) of global investors believe the world economy will strengthen over the coming year. A resulting overweight in equity allocations were reported by nearly half (48%) of survey respondents, up 7% from May.
The flight from global emerging market equities was equally swift, falling to its lowest allocation since December 2008. 9% of investors are now underweight emerging market equities, marking the first underweight reading for the asset class since 2009 -- and down from a 3% overweight last month. The conviction is firm, as a quarter of the global money managers now say that emerging markets is the region they would most like to underweight in the coming 12 months, the lowest-ever reading.
The panel of 248 money managers surveyed now see a China hard landing as the greatest tail risk - presenting more of a concern than eurozone sovereigns or banks.
Allocations to commodities have also plunged to a record low, with just under a third (32%) of the managers surveyed holding underweight positions.
"The biggest contrarian play in the market today is assets linked to China," says Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. "The lows in emerging market equity and commodity allocations suggest the market has over-positioned itself for a shock from China."
Meanwhile, enthusiasm for Europe is gaining momentum: 6% of global investors are now overweight eurozone equities, representing a 14% turnaround from May when 8% were underweight. Inside Europe, the confidence is even more rampant. 45% of European respondents to the regional money manager survey expect Europe's economy to strengthen in the coming year, up 24% in one month.
"Investors can now see a certain level of stability returning to Europe's economy and positioning for a recovery has started," said John Bilton, European investment strategist.