EMs, Japan gain favour as risk appetite grows

Global investors are overweight emerging markets for the first time since November, with India particularly in favour, according to Bank of America Merrill Lynch’s (BoA-ML) latest monthly fund manager survey*.

In the poll two months ago investors said the asset class was the most undervalued they had seen it in 13 years.

India is by far the most heavily favoured EM globally, with a net 75% of global managers overweight the market, up from around 50% in May and 44% in April. Asia Pacific investors were similarly upbeat on the country, moving from a 3% UW to 23% overweight. 

Indonesia and Mexico are the only other EMs with a net OW among global allocators this month.

The signals were mixed for China and Taiwan. While global allocators switched from about a net 20% OW China last month to being roughly a net 20% UW in June, Asia-Pacific investors turned bullish, switching from about net 4% UW to net 5% OW.

Sentiment towards Taiwan among global EM investors improved, with around a net 20% of respondents UW this month, up from about net 65% UW last month, while Asia-Pacific investors became less bullish, declining from a net 24% to 14% OW.

Opinion was also divided on Malaysia, which saw a drop in the number of global EM managers underweight the country, yet sentiment among Asia-Pacific investors turned more negative, with the amount of UW investors increasing. It remains the least favoured of Asian EMs.

Despite improving sentiment, global investors’ EM holdings remain below the survey’s historical average.

Among Asia-Pacific investors, sentiment turned most negative on Australia, going from about a net 4% to some 20% underweight.

The biggest month-on-month changes to global managers’ positions were increased exposure to EMs and Japan, and cuts in allocations to the insurance, utilities and industrials sectors.

Though equities in Japan have underperformed this year, a net 21% of managers are now OW the country, up from 7% last month. A net 10% would like to overweight Japan in preference to all other equity markets in the next year.

That marks a reversal of sentiment from earlier this year, when the effects of the Abenomics stimulus measures seemed to be waning. In April, only a net 13% of investors were overweight Japanese equities, down from 16% in March and 30% in February.

Longer-term conviction on European equities has started to decline. A net 21% of managers expect to overweight them in the next 12 months, half of the level from five months ago and down from 28% last month. Bearishness is emerging because investors no longer see quantitative easing by the European Central Bank as imminent, the survey said.

“Europe has been a cheap way to get equity exposure, but investors no longer see Europe as cheap. This together with some uncertainty on the level of growth may be why optimism is starting to wane,” said Obe Ejikeme, European equity and quantitative strategist at BoA Merrill.

This may also partly explain why EM exposure has increased. That said, allocation to European equities rose to a net 43% this month from 36% last month.

Turning to the US, bullishness on the dollar has re-emerged strongly, with a net 79% of respondents expecting the currency to appreciate over the next year.

And allocation to US equities increased to a net 10% of respondents being OW, from 6% last month.

Meanwhile, there was a big change of sentiment among global investors on cyclical sectors, most of which saw double-digit allocation increases month-on-month, and defensive plays and late-cycle/commodity sectors, which saw the largest underweights.

Globally, respondents see stocks as the most overvalued since 2000.

* A total of 223 panellists with $581 billion of assets under management participated in the survey from June 6-12. A total of 120 managers with combined AUM of $270 billion took part in the regional surveys.