Investor sentiment on emerging markets remains near record lows, amid a strong consensus that the US Federal Reserve will raise interest rates next month, according to Bank of America Merrill Lynch's monthly fund manager survey.
Eight in 10 fund managers expect the Fed to hike rates in December, up from 47% last month. The futures market also puts the probability of a rise in rates sharply up, to 66% from 25% in mid-October.
Moreover, a net 67% expect the dollar to appreciate in the next year, up from 56% last month. This has resulted in the greenback becoming the most crowded trade, followed by short commodity stocks and short EM equities.
Global growth expectations have also climbed, with a net 40% of fund managers predicting a stronger world economy over the next 12 months, up from 18% in October.
Consequently risk appetite overall has risen, for developed markets at least. The percentage of asset allocators overweight equities rose by 17 points to a net 43%, while real estate and alternative investment overweights are close to record highs.
On a regional basis, however, India has fallen out of favour from being the most overweight (a net 17%) in Asia Pacific back to neutral, while China has seen its net OW more than double from 15% to 33%.
This comes on the back of abating concerns over a China slowdown, with Asia-Pacific managers turning neutral on the mainland economy strengthening over the next 12 months, the most positive reading in over a year.
Fund managers have also turned positive on Taiwan stocks, going from neutral to a net 13% overweight this month. They have increased their underweights on both Australia and Malaysia to 19% from 12%.
Meanwhile, Europe and Japan strengthened their positions as, respectively, the most and second most favoured equity markets globally. A net 58% of global fund managers now say they are OW eurozone stocks and a net 28% are OW Japanese equities. This reflects the stronger consensus on the dollar, according to the survey.
However, while European equities are loved by global investors, sector positioning shows local asset managers are lacking conviction and hugging their benchmarks, said Manish Kabra, head of European quantitative strategy at BoA Merrill.
An overall total of 201 panelists with $576 billion in assets under management participated in the survey from November 6 to 12. A total of 164 managers, with $465 billion, participated in the global survey, and 92 managers, running $213 billion, in the regional surveys.