A spike in optimism towards China’s economy is one sign that emerging markets could be set to recover in the months ahead, according to the BofA Merrill Lynch Fund Manager Survey for September.
A net 28 percent of respondents from Japan, Asia Pacific Rim and global emerging markets believe China’s economy will strengthen in the year ahead. That’s in sharp contrast with the net 32 percent forecasting a weakening economy just one month ago – a monthly swing of 60 percentage points.
Negative sentiment towards global emerging markets has stabilized. The number of investors saying that emerging markets is the region they most want to underweight has fallen to a net 21 percent in September from a net 29 percent a month ago.
Investors are indicating that they see the best value in emerging markets in almost a decade. A net 36 percent of the panel says that global emerging market equities are the most undervalued – or cheapest – of all the regions. This is the strongest undervalued reading since January 2004. Asset allocators, meanwhile, have been steadily decreasing the underweight positions in commodities since June. A net 16 percent of the panel is underweight this month versus a net 26 percent in July.
Demand for capital investment at highest since 2005
Respondents to the Fund Manager Survey are sending a powerful message to companies that they should prioritize capital expenditure (capex) over other uses of cash.
More than half of the panel – 54 percent – says that increasing capital spending should be the top use of cash flow, up from 45 percent in July and the highest reading since December 2005.
In contrast, only 11 percent believes that improving balance sheets should be a priority. A growing number of respondents would like to see companies borrow more.
A net 42 percent says companies are under leveraged, compared with a net 35 percent two months ago. Significantly, the survey shows less demand for companies to return cash to shareholders. The proportion of the panel asking companies to prioritize buy backs and dividends has fallen from 37 percent in July to 28 percent in September.
Great rotation from bonds in evidence
September’s Fund Manager Survey shows how the great rotation from bonds to equities has progressed. The gulf between allocations towards equities and bonds is at its widest since February 2011, and the second-widest in the history of the survey. A net 68 percent of asset allocators are underweight bonds, the greatest underweight position recorded since April 2006 – to give a bond to equity allocation spread of 128 net percentage points.