Investors turn sharply bullish on China growth prospects

Investors have swung from bearish to bullish on China in the past month amid improving confidence in the country’s economic growth, finds Bank of America Merrill Lynch in its monthly fund manager survey for September.

A net 11% of respondents now expect stronger economic growth in China over the next year, compared with a net 19% who expected it to weaken last month and a net 39% who were bearish in July. The 30% swing from August to September is the survey’s largest positive change since May 2009.

Global emerging market (GEM) investors raced back into Chinese equities, with a net 22% overweight in September, contrasting to a net 22% underweight in August.

Asia-Pacific investors remain strongly overweight on China, while they cut back overweight positions in both Hong Kong and Korea. Malaysia took over from Australia as the least favoured market among these allocators.

Overall, GEM maintained its status as the most favoured region for equities, slightly extending its lead over the eurozone. A net 32% are overweight on emerging markets, although slightly down from 38% last month.

Yet generally investors are evenly divided over whether global growth will strengthen in the next year. Sentiment was broadly neutral towards the US, eurozone and the UK, and became more bearish towards Japan.

Michael Hartnett, chief global equities strategist at BoA Merrill research, notes that this renewed optimism in China’s economic growth provides some hope of an improvement in investor sentiment. “The question is whether China is a sufficient catalyst to spark a change,” he adds.

The survey also heard global investors voice the view that equities are undervalued (a net 38%) and bonds overvalued (a net 68%). This is the first time since the survey started measuring it in 2003 that the spread in perceived valuations between bonds and equities has jumped over 100 percentage points.

Nevertheless, asset allocators reduced their underweight positions in fixed income in September. A net 15% are underweight bonds, from a net 23% in August.

Meanwhile, global investors said that Japan was the region that they would most like to underweight. A net 32% are already underweight Japanese equities, compared with a net 11% in July.

Furthermore, an unprecedented net 72% believe that the yen is overvalued and that number has been steadily increasing since June. The survey was carried out before Japan intervened in the currency market on September 15, sending the dollar sharply higher against the yen.

Despite subdued global risk appetite, Gary Baker, head of European equities strategy at BoA Merrill research, notes that two-thirds of investors view European equities as cheap, offering scope for a rally should economic news improve.

A net 60% of European fund managers are convinced equities are undervalued, the highest reading since February 2003. Global asset allocators agree, with a net 22% saying the eurozone is the cheapest region (marginally down from 25%). The UK is seen as the second cheapest region, at a net 7%, slightly ahead of Japan at 5%.

A total of 215 fund managers managing a total of $579 billion participated in the global survey from September 2 to September 9. In the regional surveys, 177 managers with a total of $382 billion took part.