The January Bank of America Merrill Lynch Fund Manager Survey shows that investors have trimmed risk and cut back on China growth optimism, resulting in a further reduction in emerging market (EM) positions. A net 43% of global asset allocators are overweight on the asset class, down from a November peak of 56%. Excess longs have been shaken out in recent months as EM has underperformed. It?s encouraging that EM positions are now less stretched.
Country positioning remains broadly unchanged from December. Major overweights remain Russia (+50%), Brazil (+30%) and Turkey (+25%). The big underweights are Malaysia (-55%), S Africa (-40%) and India (-35%).
Asia Pac investors are also overweight on commodity and cyclical sectors. Biggest overweights are industrials (+60%), materials (+45%), technology (+45), energy (+30%). Biggest UW?s are the defensive utilities (-75%), telcos (-45%) and healthcare (-35%). Country conviction is much lower than sector conviction. The favoured market is Taiwan, though only a net 17% are overweight on it. Korea (+15%) is also favoured.
China?s positioning dropped sharply (from +15% to +9%) as growth expectations have deteriorated. Largest underweights are still India (-21%) and Australia (-13%).
Cash balance rose for a second month from 3.6% to 3.7% (above the 3.5% sell signal for global equities). Notably, that global backdrop remains favourable and net 72% of global investors think inflation will be higher in 12 months, highest reading since 2005. Rising inflation via commodity prices is good for EM commodity exporters, though a broader rise in EM inflation has already become a headwind for EM equities.