As the world markets seemingly recover their poise, the monthly survey of big investor confidence from Bank of America/Merrill Lynch says increased confidence about China has emerged from the September assessment.
With investors and fund managers in the survey back from their (Northern hemisphere) holidays with a defensive mindset, they nevertheless expressed fresh hopes for China’s economic prospects.
At the same time many more think gold is over valued (and gold hit three new highs last week) and more big fund managers are going off investing in Japan.
The big positive swing so far as China’s recovery is concerned, is good news for the Australian market and stocks like our miners (BHP and Rio) and will probably see the Aussie dollar move further towards parity with the greenback.
But we should keep an eye on global banks and eurozone countries such as Ireland (See separate story).
In fact the survey shows sentiment about the Chinese economy has swung from significantly bearish to bullish in just one month, while since July, the move is even larger.
A net 11% of respondents believe that the Chinese economy will strengthen over the next 12 months – a 30% swing and the largest positive monthly change since May 2009.
In August a net 19% said that China’s economy would weaken, while in July a net 39% were bearish over China.
The survey says that investors within Global Emerging Markets (GEM) have backed this turnabout with action, racing back into Chinese equities, with a huge swing from being underweight Chinese equities to being over invested.
"A net 22 percent of the regional panel are overweight Chinese equities in September. In August a net 22 percent were underweight China."
The survey reveals that Global Emerging Markets are still the favoured region for equities and has slightly extended its lead over the eurozone. Sentiment is broadly neutral towards the U.S., the eurozone and the U.K. while the panel has become more bearish towards Japan.
"Despite subdued risk appetite, two thirds of investors view European equities as cheap, the highest reading since February 2003. This offers scope for a rally should economic news improve," said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Research.
"Renewed optimism in Chinese economic growth provides some hope of an improvement in investor sentiment in the coming months. The question is whether China is a sufficient catalyst to spark a change," said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Research.
The defensive mindset shows itself in the approach towards the December quarter.
"Global investors are approaching the fourth quarter with a heightened sense of caution.
"One key signal of low risk appetite is large numbers of investors simultaneously saying that equities are undervalued and bonds are overvalued.
"The spread in perceived valuations of bonds and equities has ballooned to more than 100 points for the first time since the survey started measuring it in early 2003.
"A net 38 percent of the panel believe equities are undervalued while a net 68 percent believe bonds are overvalued.
"Nonetheless asset allocators reduced their underweight positions in fixed income.
"A net 15 percent of asset allocators are underweight bonds in September, down from a net 23 percent in August."
The survey shows that many more fund managers have moved to overweight cash positions.
"A net 20 percent of the panel was overweight cash this month, double the level in August.
"Average cash balances have risen to 4 percent of portfolios, up from 3.8 percent last month."
And global sector allocations highlight a more defensive approach.
"Asset allocators have sharply reduced their underweight positions in utilities.
"A net 11 percent of the panel is underweight the sector this month, compared with a net 27 percent in August.
"More respondents are overweight pharmaceuticals than one month ago.
"Allocators have scaled back positions in industrials and technology.
"A net 4 percent of asset allocators are overweight industrials, down from a net 12 percent in August.
"The proportion of respondents overweight technology has fallen to a net 25 percent from a net 34 percent.
"Gold, another safe haven, is perceived as increasingly overvalued at a time when it has been approaching a new record high.
"A net 19 percent of the global panel believed gold is overvalued compared with a net 12 percent in August."
Faith in the Japanese market took a further knock in September’s survey.
“A net 20 percent of the global panel says that Japan is the region they would most like to underweight and the gap between it and the U.S., the second-least favoured destination, has widened.
"A net 32 percent are already underweight Japanese equities, compared with a net 11 percent in July.
"Furthermore an increasing number are indicating that the yen should fall against major world currencies.
"An unprecedented net 72 percent believe that the yen is overvalued, and that number has been steadily increasing since June from a net 48 percent.
"Within Japan, confidence in the economy and in corporate earnings continues to weaken.”
The survey consisted of 215 fund managers, managing a total of $US579 billion September 2 to September 9 and 177, managing $US382 billion, participated in the regional surveys.
That mean
