Big global investors have become more cautious because of the tensions in Ukraine crisis and the slowing Chinese economy and spate of company collapses.
According to the latest Bank Of America/Merrill Lynch survey of global and regional investors (covering $US636 billion in funds under management), some 81% of investors now view geopolitics as the biggest threat to the stability of financial markets, an increase from just 20% in February.
The survey was taken last week and released earlier this week. It was out before the US Federal Reserve revealed sharp changes to its market guidance which suggest interest rates will rise more quickly, and start earlier than previously thought.
That change is sure to change investor perceptions in the April survey, released in about a month’s time.
The bank said the survey revealed that investors viewed emerging markets as the next biggest threat, and that the outlook for China had worsened.
A net 47% of regional investors in Asia expect the Chinese economy to weaken in the coming 12 months, up from 41% last month. In fact expectations for Chinese growth, as measured by this survey, are now lowest since last July. Confidence in China has been shaken recently by weak economic data and the country’s first corporate bond defaults.
Not unnaturally, these worries about Ukraine and Chinese growth have seen fund managers cut their exposure to shares. A net 36% of investors have an overweight position in equities, a 15-month low and down from 45% in February.
And, 3% of fund managers were underweight emerging market stocks, a record low. At 4.8%, cash levels are at levels last seen nearly two years.
But investors did find value in emerging markets with a record net 49% of the global panel suggesting that emerging markets were the most undervalued of the regions, compared with a net 36% in January.
Sentiment also improved about the prospects for emerging economies such as Indonesia, India and Mexico.
As well, investors remain overweight year-to-date outperforming market sectors – technology and healthcare – and are underweight the under-performers – telecoms and materials.
Not surprisingly, global asset allocators still like eurozone shares. For the seventh month running, the EU remains the most preferred region.
However, the number of investors looking to own EU stocks on a 12-month view dropped from its all-time high reading last month of net 40% to net 35% in March.
"With neither inflation nor recession posing a threat, we believe the equity bull market is far from over and investors should be putting excess cash into risk assets," said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
"We see signs that recent exuberance in sentiment and positioning in Europe is waning. While Europe’s recovery remains in play, markets likely need to consolidate further before resuming their upward trend," said John Bilton, European investment strategist.
At the same time, investor demands for companies to borrow and invest has eased.
A net 34% of respondents say that corporate balance sheets are under-leveraged, down from a net 40% last month.
A net 63% believe that companies are underinvesting, down from last month’s high of a net 67%. But that is still a strongly held belief.
The survey revealed that sectoral allocations this month have reinforced a defensive mindset with a sharp fall in allocations towards banks and a rise in allocations to energy companies and utilities (which are more reliable income or yield plays).
Hedge fund managers provide an illustration of the risk-off mentality taking shape in this month’s survey, having reduced both leverage and exposure to equities.
The weighted average ratio of gross assets to capital has fallen to 1.34 times from 1.49 times, the lowest in 20 months and 31% of hedge funds have a leverage ratio of less than one time – compared with 19% in January. (How will they make their outsized fees if they have cut their leverage?)
Weighted net exposure to equities has fallen to 29%, down from 38% in January and the lowest since June 2012.
