Investor sentiment sours on China

Global investor sentiment is down on China, Japan and the US this month over last, according to Bank of America-Merrill Lynch's fund manager survey* for September. This comes amid concerns over the US scaling back stimulus measures.

China saw the most significant fall in allocations. Fund manager sentiment towards the country has reversed, with a net 25% of respondents expecting the nation's economy to weaken this month, up from a net 6% in August.

The country had led global emerging market (GEM) investors’ country preferences last month, followed by Indonesia, Russia, South Africa and Taiwan. But this month Taiwan led the pack, followed by Mexico, Korea, India and Poland. 

Asia-Pacific investors’ sentiment has soured even further on China, with the nation featuring among their least favoured four countries this month, down from being second most popular in August. The three most overweighted this month are New Zealand, Thailand and Taiwan, in that order.

The US has also lost its lustre, with allocations to US equities falling to a 19-month low for this survey, with a net 1% of managers overweight the country this month.

“This month’s survey highlights the end of US and European central bank consensus – and as the first Fed rate hike since 2006 draws closer, we’ll see a new US dollar bull market and movement out of bonds,” said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch.

“The Fed isn’t tightening, it’s just removing its extraordinary accommodation, as it has slowed bond purchases. There’s a lot of concern it will remove that,” said Bob Baur, chief global economist at Principal Global Investors.

He predicted to AsianInvestor that the Fed would raise interest rates for the first time in June, probably from 0% to 0.25%, then 0.50%, before ending the year at 0.75%.

Indeed, about half of the BoA-Merrill survey respondents expect the Fed to raise interest rates in the second quarter of 2015.

“Yellen is still concerned about 6.1% unemployment and a large number of long-term unemployed in the US,” said Baur. “But most coincident indicators – jobless claims, business surveys and consumer confidence – are rising. The economy is probably better than the Fed thinks.”

Meanwhile, 86% of investors globally expect the dollar to be the best performing currency over the next 12 months, according to the survey.

Overall, sentiment on emerging markets was down. There was a slightly lower allocation to EM equities among global investors, down to net 14% overweight in September from a net 17% overweight last month. Moreover, a net 8% intend to overweight EM this month, down from a net 21% last month.

Allocations to Japan equities also declined, to a net 23% overweight this month from a net 30% overweight in August. Despite this fall, the current allocation remains well above the long-term average.

However, Europe was a brighter spot amid the relative gloom.

Sentiment towards eurozone equities has improved following monetary easing by the European Central Bank earlier this month. Global investors overweighting the eurozone rose to a net 18% in September from a net 13% last month.

Europe fund managers cited renewed stimulus measures as the major source of growth for the eurozone over the next 12 months.

* A total of 202 managers with a combined $556 billion of assets under management participated in the survey from September 1-7. A total of 96 managers with combined AUM of $199 billion took part in the regional poll.