The Bank of America Merrill Lynch (BofA ML) survey of fund managers has found that the net overweight stance of fund managers on emerging markets (EMs) has gone up from 5% in February 2017 to 18% in March.
This is the biggest month-on-month jump in allocations to EMs in almost three years and explains the strong rally in EMs. Year to date (21 March), the MSCI EM equity index is up 12.85% in dollar terms, compared to a rise of 5.43% for the MSCI World Index, which is a gauge of developed markets. MSCI India is up 15.34%, outperforming the EM index handily.
With the latest jump in net allocations, relative EM versus developed market positioning among global fund managers improved from last month. The BofA ML survey says EM is no longer a contrarian play.
Nevertheless, fund managers’ cash levels are at 4.8%, which is high, but will they deploy it in EMs?
A net 44% of investors still think that EM equities are undervalued. As the chart shows, net overweight allocations to EMs were much higher in September and October last year, so there’s scope for a move up.
But the BofA ML survey argues for a pause on the basis of: stocks deemed most “overvalued” since 2000; equity allocations up to a two-year high; and bond allocations down to a three-year low.
Much depends on US policy. Markets sold off last Tuesday in the US on worries that the Trump reflation trade was getting a bit long in the tooth, given that there are few signs yet of hoped-for policy boosters (tax cuts, infra spends).
Will this affect EMs? A Citi Research note provides perspective: “In the short-run, emerging markets are likely to follow the lead from the deterioration in equity and commodity market sentiment. However, as investor positioning in EM isn’t particularly heavy (especially in Asia), and given the support from lower US yields and the ongoing softening in the dollar, we do not anticipate a significant EM selloff.”