Confidence in China and India slumped this month, while optimism over the overall global economy held steady from August, according to Merrill Lynch's survey of fund managers for September.
A net 35% of fund managers expect the Chinese economy to strengthen over the next year, down from 49% last month and a peak of 62% in June. Emerging market investors are now 9% underweight on China, after 13 months of being overweight. They have also gone from being around 5% overweight India in August to at least 25% underweight this month.
Yet confidence in the global economy remains strong, with 72% of investors expecting it to strengthen over the next year, about the same as last month. But 72% also believe both growth and inflation will be below trend. Less than one-third of investors now see the global economy in recession compared to two-thirds only two months ago.
Despite the improving macro backdrop, investors have not increased their appetite for risk. Globally, cash levels increased in September, with average cash balances rising to 4.1% of total assets, compared with 3.7% in August, which had been the lowest level since July 2007. It was a similar story for global emerging market investors, with average cash balances rising to 4.1% from 3.5%.
In terms of global asset allocation, the proportion of investors overweight equities slipped to a net 27% from a net 34% in August. Investors lowered their allocations to eight out of 11 industry sectors. August's tentative steps back to cyclical stocks were reversed. Panelists reduced their positions in materials, industrials and discretionary stocks.
Asset allocators now see equities as undervalued (net -4% against the net 1% overvalued last month). However, they continue to see bonds as overvalued, with net 38% against net 34% last month.
As for regional allocation, global emerging markets remain strongly overweight, but fell to 40% from 52% overweight. But asset allocators are the most confident they've been on Europe in 18 months. Only a net 1% of respondents is underweight the eurozone, down from 13% in August. That's the most positive stance on the region since February 2008, when asset allocators held a slight overweight position.
Global inflation expectations over the next 12 months have dropped from a net 30% last month to a net 21%, helping explain how bonds are rallying despite growing economic optimism. A net 70% of investors still see higher short rates 12 months out.
"September's jump in cash levels and lower equity exposure shows that investors' risk appetite lags their confidence in the recovery," says Gary Baker, head of European equity strategy at Banc of America Securities-Merrill Lynch Research.
Michael Hartnett, chief global equities strategist at Banc of America Securities-Merrill Lynch Research, adds: "Goldilocks is back in town. The consensus expects a global recovery, but expects it to be below trend and not inflationary."
A total of 234 fund managers, managing a total of $667 billion, participated in the global survey from September 4-10. A total of 189 managers, managing $408 billion, participated in the regional surveys. The survey was conducted by Banc of America Securities-Merrill Lynch Research, with the help of market research company TNS.