Appetite for EMs takes a hit
Global fund managers allocation to EM equities in October slumped to lowest since September 2018
Emerging markets (EMs) are losing their attractiveness among global fund managers, said a BofA survey released on Tuesday. The monthly survey showed least bullishness since October last year. It said fund managers are underweight on EMs and want to cut exposure in the next 12 months as China fears weighed on sentiment.
Global fund managers’ allocation to EM equities in October slumped to their lowest since September 2018, falling 3 percentage points (pp) month-on-month to net 5% underweight. In contrast, allocation to US equities increased 6pp to 16% overweight, the largest overweight since November 2020.
The BofA survey said cash levels among investors rose to a 12-month high signalling growing caution as global growth expectations turn negative for the first time since April 2020 due to inflation and pessimism around China. For the fifth straight month, fund managers identified inflation as the biggest tail risk for markets, with 48% of respondents citing it. “Net 6% of investors say global growth to weaken next 12-months. A majority of FMS investors think inflation is transitory at 69% while 38% say inflation is permanent,” BofA said. A majority of global fund managers are expecting higher short-term rates while pencilling in one rate hike by US Federal Reserve by 2022. They forecast a steeper yield curve drop to the lowest since June 2019 while US fiscal stimulus hopes drop from $1.9 trillion to $1.7 trillion. With the Fed likely to announce tapering in November, fund managers think the most likely outcome will be higher volatility, a stronger dollar and higher credit spreads.
Global bond allocation fell to the lowest level ever to a net -80% as expectations of higher rates continued to rise on the back of inflation fears.
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