Emerging markets aspect cut to record low, US rate hike likely
Print Edition
Investors have cut their exposure to emerging markets to record-low levels and increasingly expect the United States to raise interest rates in September, a survey showed yesterday.
The monthly Bank of America Merrill Lynch poll of 202 fund managers showed China鈥檚 slowing economic momentum and an emerging market debt crisis had replaced a eurozone break-up as the biggest global 鈥渢ail risk鈥 in investors鈥 minds.
The share of participants expecting the Federal Reserve to hike rates for the first time in almost a decade next month rose to 48 percent, despite a sharp drop in growth and inflation hopes.
鈥淚nvestors are sending a clear message that they are positioned for lower growth in China and emerging markets,鈥 said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
Global growth and profit expectations fell to 10-month lows, the survey showed, though only 6 percent of those who took part thought there would be another global recession in the coming year.
European stocks remained the favorite global trade among participants, although anything exposed to China or commodities was being avoided.
Holdings were still historically high, albeit down a shade at 5.2 percent from July鈥檚 post-Lehman crisis high of 5.5 percent.
Japan鈥檚 yen was viewed as the most 鈥渦ndervalued鈥 currency to the tune of a net 13 percent, sterling was the most 鈥渙vervalued鈥 and the euro was seen to be undervalued for only the second time in nine years.
The US dollar was also gauged to be overvalued by a sizable proportion, with 45 percent also saying 鈥渓ong-dollar鈥 was the world鈥檚 most overcrowded trade.
BofA Merrill Lynch鈥檚 analysts pointed out that the last four times the dollar鈥檚 valuation has risen by a similar magnitude, emerging markets stocks have rallied by an average 8 percent in the three months after.
There was also a record 鈥渦nderweight鈥 in commodities following the recent slump in oil and metals markets.
The positioning in stocks also painted a telling picture. Utilities and oil & gas are by far the biggest consensus 鈥渟ells,鈥 with net 56 percent and net 53 percent 鈥渦nderweights鈥 respectively.
Sector allocation remained biased toward a US-led 鈥渄eflationary recovery鈥 it added, with investors also cutting back in banks and tech firms and moving into telecoms and health care.
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