Despite a defensive mindset among investors, fresh hopes are emerging about China's economic prospects, according to a global BofA Merrill Lynch Survey of Fund Managers for September.
Sentiment over the Chinese economy has swung from significantly bearish to bullish in just one month. A net 11% of 215 respondents believe that the Chinese economy will strengthen over the next 12 months - a 30% swing and the largest positive monthly change since May 2009. In August a net 19% said that China's economy would weaken. In July a net 39% were bearish over China.
Investors within Global Emerging Markets (GEM) have backed sentiment with action, racing back into Chinese equities. A net 22% of the regional panel are overweight Chinese equities in September. In August a net 22% were underweight China. GEM has retained its status as the most favoured region for equities and has slightly extended its lead over the eurozone. Sentiment is broadly neutral towards the U.S., the eurozone and the U.K. while the panel has become more bearish towards Japan.
Japan Slips Further Behind
Faith in the Japanese market took a further knock in September's survey. A net 20% of the global panel says that Japan is the region they would most like to underweight, and the gap between it and the U.S., the second-least favoured destination, has widened. A net 32% are already underweight Japanese equities, compared with a net 11% in July.
Furthermore an increasing number are indicating that the yen should fall against major world currencies. An unprecedented net 72% believe that the yen is overvalued, and that number has been steadily increasing since June from a net 48%. Within Japan, confidence in the economy and in corporate earnings continues to weaken.
Sense of Caution
The survey finds that global investors are approaching the fourth quarter with a heightened sense of caution. One key signal of low risk appetite is large numbers of investors simultaneously saying that equities are undervalued and bonds are overvalued.
The spread in perceived valuations of bonds and equities has ballooned to more than 100 points for the first time since the survey started measuring it in early 2003. A net 38% of the panel believe equities are undervalued while a net 68% believe bonds are overvalued.
MORE ARTICLES ON CORPORATE FINANCE