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.