It’s no surprise that the Bank of America Merrill Lynch Survey of Global Fund Managers for May shows a smart rise in risk appetite. Their Risk and Liquidity indicator, which was 28 in March, moved up to 35 in April and to 38 in May. It’s now back to the level it was at in November 2007. Small wonder then that emerging markets (EMs) are back in fashion. A net 46% of fund managers are now overweight on EMs, one of the highest readings recorded, compared with 26% in April and a mere 4% in March.
But November 2007 was also the frenzied period before the bubble in EMs burst. That is probably why the survey points out that “allocation to EM equities has climbed back to bubble-like levels... Optimism on emerging markets is extreme... EMs would be more vulnerable than other regions to bad news.”
The rally has been fuelled by investors putting their cash to use. Cash balances were 5.2% last March, 4.9% in April and 4.3% in May. But the survey says there’s still scope to rally further. It says, “Asset allocators remain underweight equities (-6% from -17%)... This relatively resolute defensive stance may indicate scepticism in the rally thus far, or may simply reflect the reality of the speed with which things have moved. We see this as a potential support and funding source for equities at this point.” But they add that EMs are over-exuberant, with a “hint of potential irrational exuberance”. Cash positions with Asian investors have dropped sharply.
The survey also indicates the reason for the surge of money coming into India after the election results. While India was the third highest overweight among EMs in April, with more than a net 30% being overweight, some of that money was taken out of the country before the elections.
The May survey, done before the election results were out, shows that slightly more than a net 10% were overweight on India and it had slipped to being the seventh highest overweight. The survey says that “May rotation was away from Israel, Chile, Malaysia and India (prior to the elections).” With 80% of investors being overweight on China, it’s likely that India will benefit from country rotation in future.
As for sector preferences, the survey finds that “global emerging market (GEM) investors think the global cycle now favours GEM early cyclicals rather than GEM domestic demand plays”.
What next? According to Bank of America Merrill Lynch, “With positioning now more balanced, markets in the second half will be driven by the economy and earnings. The Fund Manager Survey says the market ‘grinds higher’ via asset allocation moves and pressure from the ongoing underweight in global banks. The grind lower risks revolve around weaker Chinese/EM data. Contrarian trades to mull over are long Europe/Japan, short EM/China; long pharma/utilities, short technology/materials.”