Global Economy
Global investors shift focus to China; EM outflows surge to $1tn in 13 months
By Michael Hennigan, editor and founder
Aug 19, 2015 - 4:28 AM

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Global investors have shifted their attention from Greece to China amid continued concern of a Chinese recession, according to the BofA Merrill Lynch Fund Manager Survey for August. Respondents are scaling back their expectations for economic growth. Meanwhile, the Financial Times reports that "a surge of capital gushing out of emerging markets (EM) has risen toward $1tn over the past 13 months, roughly double the amount that fled during the financial crisis amid slumping confidence in the world’s developing economies."

  • A Chinese recession is now rated the number one “tail risk” by 52% of the BofA Merrill Lynch panel;
  • Fifty-three per cent of investors say the global economy will strengthen in coming year, down from 61% in July;
  • The survey reports the lowest allocations to emerging markets equities since April 2001 and to the Energy sector since February 2002;
  • More investors say Global Emerging Markets is the region they most want to underweight; Europe is the region they most want to overweight;
  • The survey notes a rising consensus that the Fed will raise rates in third quarter; the majority of panel now expects the yield curve to flatten in next 12 months;
  • An anti-commodities stance is evident with moves out of Energy and Materials while defensive weightings increase.

"Investors are sending a clear message that they are positioned for lower growth in China and emerging markets” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

“European stocks remain in favour – but investors like domestically focused names and are avoiding anything exposed to China or commodities,” said James Barty,  head of European equity strategy.

The FT reports that total net capital outflows from the 19 largest emerging market economies reached $940.2bn in the 13 months to the end of July, almost double the net $480bn that flowed out during three quarters during the 2008/09 financial crisis, according to a compilation of official data and estimates by NN Investment Partners, an investment bank.

The bank reported that in the period July 2009-June 2014 a net $2tn had flowed into these markets.

Data from Capital Economics show that in June as currencies of some EM economies fell to their lowest levels versus the US dollar since the Asian crisis of 1997/98, imports had dipped 13.2% year-on-year.

CNBC says that not all fund managers are actively shunning emerging markets, with Jean Medecin, a member of investment committee at Carmignac, France's largest independent asset manager by funds under management, describing the current investment climate as a "stock-pickers market".

"I think it is usually when you have a point of maximum fear that you have got the greatest opportunities, so the Chinese market is so large and so deep that you can't just make an argument out of a few market movements and out of a few stocks," he told CNBC.

"One of the stocks we like in particular, which is a white goods manufacturer Midea, a competitor to Electrolux or Whirlpool, and is trading on less than 12 times for more than 20 percent earnings growth. And it is actually one of the few companies that is benefitting from the weaker renminbi. So there is no such thing as being black and white with the Chinese stock market. I think it is much more like now a stock picker market and to a certain extent it is a great thing for investment managers," he added.

An overall total of 202 panelists with US$574bn of assets under management participated in the BofA Merrill Lynch survey from 7 August to 13 August 2015. A total of 162 managers, managing $449bn, participated in the global survey. A total of 100 managers, managing $224bn, participated in the regional surveys.

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