Survey: Fund Managers Foresee Weakened China Economy

(May 18, 2011) — Despite the continued strength and confidence in emerging markets, a net 28% of regional fund managers expect China’s economy to weaken in the coming year, up from a net 15% in March, according to a new Bank of America Merrill Lynch May Survey of Fund Managers.

However, this waning confidence in China’s economy – as well as in other important BRIC economies — has not negatively impacted allocations to emerging market equities, which continue to rise. A net 29% of the respondents now have an overweight position in emerging market equities, representing the highest reading in any region and compares with a net zero percent two months earlier.

Beyond emerging markets, the survey shows that an increasing number of fund managers have a pessimistic outlook on corporate profitability and global growth, with a net 10% of fund managers saying the world economy will strengthen in the next 12 months, down from a net 27% in April. The survey states that participants’ lower conviction about global growth and profit is most evident in Europe, reflecting investors’ identification of the eurozone sovereign debt crisis as the largest tail risk globally.

Furthermore, 73% of investors expect the US Federal Reserve to start increasing rates next year compared with a similar proportion who thought in April that it would occur in 2011.

In terms of asset allocation, the survey demonstrates that fund managers have trimmed their exposure to equities and commodities, while adding to cash and bond holdings slightly. “A triple dip in growth expectations is reshaping investors’ stance on risk,” says Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research, in a statement. “A risk for investors is that pessimism on Europe now looks to be overdone, particularly in light of strong recent GDP data,” adds Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.

The survey was conducted May 6-12 and included 284 fund managers with a combined $814 billion in assets under management.