Big global investors reckon the risks of a slowdown in the Chinese economy have risen, they like Japan (a point confirmed by the better than expected first quarter GDP data and the 45% jump in the Tokyo market), they are also going off emerging markets and because of their fears about China, increasingly concerned about commodity prices.
Overnight some of these fears appeared in US and European markets – but not in Asia (except for Australia). Gold fell to around $US1,387 an ounce taking its losses for the past six days of trading to 6%, oil nudged higher and copper rose. Three major US indexes, the Dow, the S&P 500 and the Nasdaq were all weak to flat.
The views of these big investors are contained in the monthly survey from Bank of America/Merrill Lynch. It provides a handy update 12 times of year of the thinking of some of the biggest investors around the world. Their views are not always right on the money – sometimes they can be a fair distance short, but it pays to keep in touch with what they are doing.
"May’s Fund Manager Survey demonstrates a clear exit from China and assets connected to China – in the shape of commodities and emerging market equities. But it’s worth noting that investors are keeping faith in global growth," Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research said in a statement accompanying the survey which just about sums up the thinking of these big investors (http://newsroom.bankofamerica.com/press-release/economic-and-industry-outlooks/bofa-merrill-lynch-fund-manager-survey-finds-investor-6).
Interestingly, besides their growing pessimism about China and commodities, these big investors have also become a bit more hesitant about shares.
America is still favour of the month for the big global fund managers with allocation to US shares equities at its highest levels since June 2012. A net 20% of fund managers were overweight US stocks this month, compared to a net 14% overweight in March and a net 1% overweight in February.
That’s helps explain the strength of the US market (as measured by the S&P 500) which is up nearly 5% so far this quarter and more than 15% for the year so far). But at the same time a few more investors now believe the US market is becoming over-valued.
The big fund managers though have cottoned on to Japan’s rebound (not too hard given the Tokyo market was up 30% in the last two months of 2012 and another 45% so far in 2013).
That has seen fund managers lift their amount of money they have allocated to Japanese shares to its highest level in years Allocations to Japanese equities are at their highest since May 2006 with a net 31% "of global asset allocators overweight Japanese equities. That is up sharply from a net 20 percent overweight in April."
"A net 44 percent of global investors say that the outlook for corporate profits is more favorable in Japan than in any other region – the most bullish outlook captured by the survey since November 2005. Japan also remains the region that investors would most like to overweight over 12 months. A net 25 percent say Japan is at the top of their overweight list, in line with April’s reading."
The flow of Japanese corporate results for the year to Match and March quarter tend to support this view.
But Japan is the standout for global giants
Despite this enthusiasm, the feeling about the US is probably why big investors have trimmed their overweight positions in shares which is now at 41% (of those surveyed) from 47% in April. and 57% in March. That tells us that quite a few investors have lost some of the strong performance in Japanese shares in the last week to 10 days. In March the percentage was 57% so there’s a clear trend of increasing concern about being too exposed to shares. The survey reveals that more big investors think that US shares are over-valued.
That helps explains why their cash position hasn’t changed from around 4.3%, up from 3.8% in April.
But the most noticeable movement in confidence in the May survey (which was released this week) is about China, which also helps explain the weakness in our market in recent weeks.
8% of managers surveyed now have a negative view about China (they expect the economy to weaken over the next 12 months) – compared with a net 9% who were positive (who saw the economy rising over the next year) about the outlook for China in April. This would help explain the weakness in Australia in recent weeks and the Aussie dollar which finished a touch under 99 US cents yesterday.
A quarter of all respondents in the May survey now say that a ‘hard‘ landing for China’s economy and a slump in commodity price is their leading ‘tail risk’ – that’s up from 18% in April. And while Europe remains their biggest concern, the margin over China has closed noticeably.
As a result of their fears about China, a net 29% of fund managers are underweight commodities, up sharply from a net 11% in March and the most negative result in the survey since December 2008 – in the immediate wake of the Lehmann Brothers collapse. That’s a very pessimistic reading and goes some way to explaining the recent weakness in commodity prices and shares (in Australia in particular) – helped by the strengthening US dollar.
"A net 17 percent of asset allocators remain underweight energy stocks. The proportion of global investors overweight emerging market equities has plummeted to a net 3 percent from a net 34 percent in March. A net 38 percent of the panel is underweight bonds, down from a net 50 percent in April," the report says.
Despite Europe being the biggest risk, the survey does show tentative signs that big investors are ‘bottom fishing‘ with the report commenting "We see signs that Europe is the region investors are watching. They are increasingly aware of cheap valuations in European stocks, and concerns over sovereign risk in the region are dissipating," said John Bilton, European investment strategist for Merrill Lynch.
The percentage of the panel naming EU sovereign bonds and banks as number one "tail risk" has dropped to 29% from 42%; a net 38% of the global panel takes the view that eurozone equities are undervalued – a significant increase from a net 28% in April.
Fund managers are more positive about growth than a month ago. "A net 24 percent of European fund managers believe Europe’s economy will strengthen in the coming year, up from a net 19 percent in April. A net 17 percent see earnings improving in the next 12 months, up from a net 14 percent. At the same time, a net 31 percent of regional investors say that fiscal policy is too restrictive, up from a net 19 percent last month," the report says.
