China hard landing worries resurface

Investors are increasingly concerned about the prospect of a hard landing for the world's second biggest economy, finds Bank of America Merrill Lynch's fund manager survey.
China hard landing worries resurface

Investor sentiment on China has deteriorated markedly this month in a sign that concerns over the country's growth expectations have returned to equity markets.

China’s CSI 300 index staged a short rally from the end of last year, rising more than 30% to nearly 2,880 points at its mid-February peak, only to fall back by nearly 10% to 2,500 points by yesterday.

In the latest Bank of America Merrill Lynch fund manager survey, respondents globally rated a hard landing in China as the tail risk to a global economic recovery that's of third greatest concern to them, after EU sovereign deflation and the US fiscal crisis. A net 18% of global investors say they are worried about a hard landing for China, nearly doubling from last month’s 10%.

This follows disappointing data indicating industrial production has slowed. In February, the flash HSBC/Markit China PMI number was 50.4, a drop from 52.3 in January. A figure above 50 indicates the manufacturing sector is expanding, while a number below 50 points to contraction.

Such disappointing data has meant global emerging market investors have scaled back their overweight positions on China. Only a net 11% of EM fund managers say they are overweight China, down from 50% in February. The drop follows four months of improving sentiment.

Negative views on China are reflected by a continued fall in allocation to commodity and resource stocks. A net 10% of global fund managers say they do not favour the sector – the highest reading since July. This month has seen global fund managers reporting their biggest underweighting of the energy sector since December 2008.

But while a net 34% of global investors have reduced their overweight in emerging markets, down from a net 43% in February, certain EMs have seen positive upticks. The most noticeable upswings are Russia, Indonesia and India, in which a net 67%, 44% and 44% of global investors are overweight, respectively.

Sector-wise, fund managers investing in Asia have largely showed a preference for cyclical sectors, with a net 55% saying they are overweight the auto industry – a figure similar to that in February. Energy has fallen even further out of favour among EM investors, with a net 45% underweight it, up from 25% last month. 

A net 55% are UW the insurance sector, up sharply from 25% last month. Utilities (net 45% UW from net 25%) and telecoms (net 35% UW from net 50%) also continue to be seen as unattractive.

A total of 254 panelists with $691 billion of assets under management participated in the BoA Merrill survey from March 8 to 14. In all, 198 managers, managing $578 billion, participated in the global survey. A total of 124 managers, managing $241 billion, took part in the regional surveys.

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