Equity allocation to emerging markets falls in July: BofAML survey

Mumbai: Emerging markets may have performed the best among peers so far in 2017 but allocation to equities in the region has fallen in July. According to Bank of America Merrill Lynch July Fund Manager Survey, emerging markets’ equities slipped to net 37% overweight from net 42% overweight last month.

“Current allocation is 0.8 standard deviation above its long-term average,” said Bank of America Merrill Lynch’s July Global Fund Manager Survey, which was conducted on 7-13 July and covered 207 panelists with $586 billion assets under management.

MSCI Emerging Markets jumped around 22%, while MSCI World gained 11.2% in this year.

The survey said that allocation to US equities slipped to net 20% underweight, while Japan equity allocation rose sharply to net 18% overweight, from just net 1% overweight last month.

The Bank of America Merrill Lynch’s July Global Fund Manager Survey said a net 80% of investors think US is the most overvalued region, while a net 19% think Eurozone equities are undervalued and a net 43% of investors think EM equities remain undervalued.

In July, global investors continued to favour banks, technology, pharma, discretionary and industrials and avoided utilities, telecoms and energy. However, allocation to technology slipped to net 28% overweight from net 37% overweight last month. “Banks were the most overweight global sector in July, knocking technology off the top spot. Since the 2009 market lows, tech has been the top sector 80% of the time. 68% say US or global internet stocks are expensive,” it said.

According to the survey, investors are considering a crash in global bond markets and a policy mistake by the US Federal Reserve or European Central Bank to be the biggest tail risks to the markets, surpassing concern over Chinese credit tightening as the top tail risk.

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“Fund managers’ biggest fears are a shock coming from bond markets or central banks,” said Michael Hartnett, chief investment strategist. “Too many investors see the Fed as a likely negative catalyst.”

The impact of the Fed balance sheet reduction in 2017 will be a non-event, say 42% of investors surveyed, while 31% see it as a risk-off event, sending yields up and stocks down.

In its monetary policy meeting in June, the Federal Reserve raised rates to a maximum of 1.25%. The minutes of the Federal Reserve Open Market Committee (FOMC) indicated that the central bank is ready to start shrinking its balance sheet in the next few months. Fed chair Janet Yellen has also said that the central bank expects to keep raising key interest rate at a gradual pace and will start trimming its massive bond holdings this year.

First Published: Thu, Jul 20 2017. 11 42 AM IST

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