Emerging markets big risk to financial market stability: BofA-ML
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Rajesh Desai
Feb 20, 2014, 12:01:31 AM2/20/14
to LONGTERMINVESTORS, library-of-eq...@googlegroups.com, DAILY REPORTS
Once considered safe and investor’s favourite investment destination, Emerging Markets (EMs) have seen a complete reversal of fortunes with allocations to the Global Emerging Markets (GEM) hitting a record low, points out Bank of America Merrill Lynch (BofA-ML) Fund Manager Survey for February 2014. A net 29 per cent of investors are now underweight emerging market equities, the survey suggests.
An overall total of 222 panelists with $591 billion of assets under management participated in the survey conducted by BofA-Merrill Lynch Research with the help of market research company TNS.
The survey findings also warn that the EM now is the biggest risk to financial market stability while the developed markets (DM) counterparty and default risk is seen as minimal. A growing proportion of investors – 46 per cent in February (37 per cent in January and 26 per cent in December) – say that a China hard landing and commodity collapse represents the biggest tail risk to the global economy.
“Rate cuts in South Africa and Turkey, have failed to have a meaningful impact on investor positioning. In fact, investors are the most underweight BRIC countries in the history of our data,” the report suggests.
Economic growth
Belief in global economic growth has also moderated, the survey shows with a net 56 per cent of the respondents expecting the global economy to strengthen in the coming 12 months, down 19 percentage points from a net 75 per cent last month.
Global equity allocations are down; a net 45 per cent of asset allocators say they are overweight equities, down from a net 55 per cent in January. Average cash balances have increased to their highest level since July 2012 of 4.8 per cent of portfolios, up from 4.5 per cent.
At the same time, a record net 40 per cent of the global investor panel says that the euro-zone is the region they most would like to overweight in the coming 12 months. US equities are becoming more popular – a net 11 per cent of asset allocators are overweight the US – up from a net 5 per cent a month ago.
Optimism towards Europe is growing with a net 40 per cent of investors saying that Europe is the region they most want to overweight. A net 12 per cent of the global panel says that Europe is the region in which the profit outlook appears the most favourable, up from a net 8 per cent a month ago.
“Investors remain firmly bullish towards developed markets and Europe in particular. But we would caution that current valuations in Europe already fully price in the region’s growth outlook,” said John Bilton, European investment strategist.
Banks preferred
In the wake of the global financial crisis, banks were unloved and GEMs were portfolio darlings. The reversal in sentiment between these two investments appears complete this month.
While allocations to GEM reached a record low, allocations to banks by respondents to the global survey have reached a record high. A net 28 per cent said they are overweight banks, a significant swing since January when a net 16 per cent were overweight.
One glimmer of hope for GEM is that the number of investors seeking to underweight the region in the coming year has eased slightly. A net 24 per cent of global investors would like to underweight GEM in the next 12 months, down from a net 28 per cent in January.
An overall total of 222 panelists with $591 billion of assets under management participated in the survey conducted by BofA-Merrill Lynch Research with the help of market research company TNS.
The survey findings also warn that the EM now is the biggest risk to financial market stability while the developed markets (DM) counterparty and default risk is seen as minimal. A growing proportion of investors – 46 per cent in February (37 per cent in January and 26 per cent in December) – say that a China hard landing and commodity collapse represents the biggest tail risk to the global economy.
“Rate cuts in South Africa and Turkey, have failed to have a meaningful impact on investor positioning. In fact, investors are the most underweight BRIC countries in the history of our data,” the report suggests.
Economic growth
Belief in global economic growth has also moderated, the survey shows with a net 56 per cent of the respondents expecting the global economy to strengthen in the coming 12 months, down 19 percentage points from a net 75 per cent last month.
Global equity allocations are down; a net 45 per cent of asset allocators say they are overweight equities, down from a net 55 per cent in January. Average cash balances have increased to their highest level since July 2012 of 4.8 per cent of portfolios, up from 4.5 per cent.
At the same time, a record net 40 per cent of the global investor panel says that the euro-zone is the region they most would like to overweight in the coming 12 months. US equities are becoming more popular – a net 11 per cent of asset allocators are overweight the US – up from a net 5 per cent a month ago.
Optimism towards Europe is growing with a net 40 per cent of investors saying that Europe is the region they most want to overweight. A net 12 per cent of the global panel says that Europe is the region in which the profit outlook appears the most favourable, up from a net 8 per cent a month ago.
“Investors remain firmly bullish towards developed markets and Europe in particular. But we would caution that current valuations in Europe already fully price in the region’s growth outlook,” said John Bilton, European investment strategist.
Banks preferred
In the wake of the global financial crisis, banks were unloved and GEMs were portfolio darlings. The reversal in sentiment between these two investments appears complete this month.
While allocations to GEM reached a record low, allocations to banks by respondents to the global survey have reached a record high. A net 28 per cent said they are overweight banks, a significant swing since January when a net 16 per cent were overweight.
One glimmer of hope for GEM is that the number of investors seeking to underweight the region in the coming year has eased slightly. A net 24 per cent of global investors would like to underweight GEM in the next 12 months, down from a net 28 per cent in January.
CA. Rajesh Desai
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