Bears in the headlights: investors trim emerging market positions

New York: Global liquidity may be abundant, but fund managers are taking lower than normal risk in their portfolios in response to softer global economic data and elevated threats from Europe, according to the latest Bank of America Merrill Lynch survey of global fund managers.

A net 28 percent of fund managers looking at Asia and the emerging markets reported being overweight in cash as they prepare for lower equity prices. They feel that at some stage equities are going to be a buy, and would like to have as much firepower as possible to take advantage of the inevitable lower equity prices.

“Emerging market-dedicated investors appear to be more cautious: they trimmed their sector and country allocations across the board in May,” said the survey released this week.

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Foreign funds turned net sellers of Indian stocks in April, the first month of withdrawals in 2012, put off by Finance Minister Pranab Mukherjee’s proposed changes in tax rules. The Securities and Exchange Board of India (SEBI) said offshore investors sold a net $102.6 million of Indian equities last month.

“India was sold on the promise of high growth which simply hasn’t panned out over the past four years,” Gautam Prakash, founder of US based hedge fund Monsoon Capital, told Reuters.

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Foreign portfolio flows into Indian stocks have dropped 99 percent to just 5.17 billion rupees ($96.5 million) since Mukherjee’s March budget that scared off investors, compared with 427.36 billion rupees in 2012 before his budget.

China’s economy also stuttered unexpectedly in April with lower than expected output data, softening retail sales and easing prices suggesting economic headwinds might be stiffer than thought. Still, 10 percent of the fund managers polled expect a stronger Chinese economy in the next 12 months, up from 4 percent a month ago.

“Our April and May surveys show investors are increasingly bullish on China’s growth prospects,” said Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.

Along with the emerging markets survey, BofA Merrill Lynch released another survey that took a wider look at the global economy, headlined “Bears in the Headlights” and found investor sentiment “bearish on growth and risk.” It reported that assets are allocated defensively and cash levels are high. “The dominant mood is one of paralysis as investors wait for a “bad” event to provoke the policy panic and market capitulation that contrarians want to buy,” said the survey.

A growing majority of global investors would like to see more stimulative fiscal policies from governments around the world, amid resurgent fears about the Greek economy. Nearly two-thirds of investors are concerned that Greece will be the source of a negative surprise this year, up sharply from 48 percent in April.

Investors are looking for greater stimulus as expectations of economic growth have fallen further and as concerns about inflation have eased significantly. Only a net 15 percent of the panel expects the global economy to strengthen in the year ahead, down from a net 28 percent in February.

The proportion of asset allocators overweight US equities fell slightly to a net 26 percent from a net 27 percent. Investors within the US are optimistic about the economy but have concerns over profits. A net 32 percent of global investors told BofA Merrill Lynch that global emerging markets is the region they most want to overweight.

Asset managers with a total of $526 billion under management responded to the BofA Merrill Lynch poll on the global, European and emerging markets.