Investors turn to US and Emerging Markets amid Eurozone fears

Global investors are seeking respite from troubles in the eurozone by turning to US and emerging market equities, according to the BofA Merrill Lynch Survey of Fund Managers for November.

Globally, investors have slightly increased their exposure to equities since October’s survey. A net 5% of the panel is underweight equities, down from a net 7% a month ago. The proportion of investors overweight US equities rose sharply to a net 20% from a net 6% in October.

Global emerging markets bounced back after a weak October. A net 27% of investors are overweight the region, up from a net 9% last month. The eurozone remains the least popular region, but the proportion of investors underweight eurozone equities ticked down just one percentage point to a net 30%.

Gloom within the eurozone has intensified. The proportion of Europeans forecasting regional recession has almost doubled. A net 72% of European respondents to the regional survey believe Europe will experience recession in the coming 12 months, up from a net 37% in October. Fears of a global recession have eased. A net 31% of investors expect the world economy to avoid a recession, up from a net 25% last month.

“Investors are showing belief in emerging market growth and US resilience, which is key to retaining positive global sentiment,” said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Research. Gary Baker, head of European Equities strategy at BofA Merrill Lynch Research, added: “European growth concerns are more intense but sentiment looks to be close to rock bottom – unless Europe’s problems spread to the rest of the world.”

Behind the increased exposure to emerging market equities is increased faith in the resilience of China’s economy. In a new question this month, the survey asked global investors if they see China’s economy experiencing a hard or soft landing in 2012.

More than three-quarters of the panel (78%) expect a soft landing, with China delivering better than 7% growth during the year. The proportion of regional investors believing that China’s economy will weaken in the coming year has fallen to a net 25% from a net 47% in October.

Fears of higher inflation, which have cast a shadow over emerging markets in recent months, have fallen away since September. A net 59% of respondents from Asia Pacific (ex-Japan) to the regional survey expect inflation to fall in the coming year, compared with a net 14% predicting higher inflation in September.

Investors’ belief in emerging markets is reflected in increased allocations to commodities and commodity-related equities. Global asset allocators have moved from underweight commodities in October to neutral this month.

The biggest positive swings in equity allocations were in energy and materials. A net 1% of allocators are underweight materials, down from a net 9% in October. The proportion of allocators overweight energy stocks stands at a net 20%, up from a net 11% a month ago.

Emerging markets and the US are the regions that investors feel most positively about. A net 28% say they would like to overweight emerging market equities more than any other region, while a net 18% opt for the US. A net 29% would most want to underweight the eurozone.

For the first time since March 2009, investors predict that short-term rates will fall in the next 12 months. A net 5% of the panel say rates will be lower a year from now, compared with a net 9% predicting higher rates last month – a potential signal that as concerns about inflation in emerging markets erode, the question of deflation could be on investors’ minds.

Despite more positive sentiment towards US equities this month, a small majority of the panel expect the US to receive a further debt rating downgrade. Fifty-three percent of the global panel believes another downgrade could take place before the end of 2013 – with more than one-third (36%) predicting a change in 2012.

An overall total 258 panelists with $665bn of assets under management participated in the survey from 4-10 November. A total of 188 managers, managing $514bn, participated in the global survey.


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