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’s slowing economic momentum and an emerging market debt crisis had replaced a eurozone break-up as the biggest global “tail risk” in investors’ 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.
“Investors are sending a clear message that they are positioned for lower growth in China and emerging markets,” 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’s post-Lehman crisis high of 5.5 percent.
Japan’s yen was viewed as the most “undervalued” currency to the tune of a net 13 percent, sterling was the most “overvalued” 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 “long-dollar” was the world’s most overcrowded trade.
BofA Merrill Lynch’s analysts pointed out that the last four times the dollar’s 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 “underweight” 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 “sells,” with net 56 percent and net 53 percent “underweights” respectively.
Sector allocation remained biased toward a US-led “deflationary recovery” it added, with investors also cutting back in banks and tech firms and moving into telecoms and health care.
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