Fund managers cut China allocations

Despite expressing confidence in China’s economy, investors have reduced exposure to Chinese equities, finds Bank of America Merrill Lynch’s July fund manager survey.

A net 6% of fund managers say they expect a stronger Chinese economy in the coming 12 months, compared to a net 0% last month. Ironically, however, their exposure to the country’s equity market reveals their bearish sentiments. Over the past month, Asia-Pacific investors scaled back their Chinese exposure from net 47% overweight (OW) to net 27% OW, while emerging-market fund managers are now market-neutral on China equities, having been net 6% OW in June.

Yet China is still the most popular market among Asia-Pacific and EM investors. By contrast, Australia “remains the consensus underweight as it remains vulnerable to a China-related commodity/growth slowdown”, says the report. Allocations to Australia have increased slightly, however, from being net 32% underweight (UW) to 22% UW during the same period.

Other markets to have seen significant swings in the past month include South Korea (EM investors: neutral to net 15% OW; Asia-Pacific investors: net 5% UW to neutral), Thailand (EM investors: net 30% UW to 11% OW; Asia-Pacific investors: neutral to net 4% OW) and India (EM investors: net 35% UW to net 15% UW; Asia-Pacific investors net 8% UW to net 4% UW). Additionally, Russia and Turkey were the largest net overweight positions this month, with EM investors net 34% and 14% OW, respectively.

Sector-wise, Asia-Pacific investors are now crowding into certain stocks, such as technology and autos, which have seen an increase from net 37% OW to net 47% OW and from net 7% OW to net 21% OW, respectively. In particular, retail has seen the biggest month-on-month jump since September, going from neutral to net 21% OW.

Banks, utilities, energy and pharmacy/healthcare experienced some of the most bearish swings. Investors are now the most underweight energy they have been (net 14% UW) since February 2007, and the most underweight banks since October 2011 (net 43% UW). Utilities fell from net 13% UW to 46% UW and pharmacy/healthcare swung from neutral to net 14% UW.

Emerging markets remain the most favoured allocation. A net 19% of fund managers are overweight EM, although that figure remains below the long-term average of 26% since 2001. This contrasts significantly with the eurozone, on which they are net 26% UW and slightly with the US, which is net 14% OW.

Separately, the survey revealed further weakening of global investor confidence due to a “severely deteriorating outlook for profits driving the fall in confidence”, says BoA Merrill. A net 69% of respondents expect corporate profit growth to be less than 10% in the coming year, marking this month as the most pessimistic point since April 2009.

On Europe, investors see an increasing risk of recession. 55% of those surveyed say the French economy could present a negative surprise this year, while 32% expect a negative surprise on the German economy – a rise of 10% from the previous month. However, fears are subsiding on the Spanish, Portuguese and Irish fronts.

A total of 190 fund managers, managing a pool of $567 billion responded to the global survey, which was conducted from July 6-12. A total of 145 managers with $323 billion in AUM responded to the regional surveys.