Investors Forecast 'Soft Landing' for China

Behind the increased exposure to emerging market equities is increased faith in the resilience of China’s economy. In a new question this month, the BofA Merrill Lynch Survey of Fund Managers asked global investors if they see China’s economy experiencing a hard or soft landing in 2012.


More than three-quarters of the panel (78 percent) expect a soft landing, with China delivering better than 7 percent growth during the year. The proportion of regional investors believing that China’s economy will weaken in the coming year has fallen to a net 25 percent from a net 47 percent in October.


Fears of higher inflation, which have cast a shadow over emerging markets in recent months, have fallen away since September. A net 59 percent of respondents from Asia Pacific (ex-Japan) to the regional survey expect inflation to fall in the coming year, compared with a net 14 percent predicting higher inflation in September.


Investors’ belief in emerging markets is reflected in increased allocations to commodities and commodity-related equities. Global asset allocators have moved from underweight commodities in October to neutral this month. The biggest positive swings in equity allocations were in energy and materials. A net 1 percent of allocators are underweight materials, down from a net 9 percent in October. The proportion of allocators overweight energy stocks stands at a net 20 percent, up from a net 11 percent a month ago.


Emerging markets and the U.S. are the regions that investors feel most positively about. A net 28 percent say they would like to overweight emerging market equities more than any other region, while a net 18 percent opt for the U.S. A net 29 percent would most want to underweight the eurozone.


For the first time since March 2009, investors predict that short-term rates will fall in the next 12 months. A net 5 percent of the panel say rates will be lower a year from now, compared with a net 9 percent predicting higher rates last month – a potential signal that as concerns about inflation in emerging markets erode, the question of deflation could be on investors’ minds.


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