Investors Move out of U.S., into Emerging Markets

The survey found significant changes in investor predictions and behavior even since June’s survey. A net 12% of fund managers expect the global economy to deteriorate in the next 12 months, down from the net positive forecasts of recent months. These changes are being made even in spite of weakened economic sentiment towards China and Europe. Since May, the proportion of respondents predicting a weaker Chinese economy has surged to a net 39% – up from a net 3% – and a net 17 % of European investors expect the region’s economy to weaken, according to a press release. 

A net 14% of the panel reports that U.S. equities is the region they would most like to underweight, a net 4% expect a drop in corporate earnings, and a net 1% anticipates a fall in profit margins. A net 12% of investors predict inflation to fall in the coming year, and as a result investors are pushing back the date they expect next to see a rate hike in the U.S. or eurozone. Four out of 10 respondents do not expect any rate hike by the Fed before July 2011, and only 4% predicted an increase this year. 

Global Emerging Markets (GEM) has been gaining popularity while investors return to the eurozone, and many global asset allocators have already reduced exposure to U.S. equities, the press release said. A net 7% of panel overweight is down from a net 20% in June, a net 48% of investors identify GEM as the region they would most like to overweight over the next 12 months, and a net 34% are overweight GEM equities, up from 19% in May. The proportion of asset allocators underweight eurozone equities has fallen to a net 10%, down from a net 27% in June. 

In the past two months, respondents have scaled back positions in global equities while moving into bonds. The proportion of asset allocators overweight equities has fallen to a net 11% from 30%, and the proportion underweight bonds has fallen to a net 15%, down from 29%. This is despite investors acknowledging that equities are increasingly undervalued and bonds increasingly overvalued. Hedge funds have reduced their net equity exposure to its lowest since March 2009. 

Investors have also shown a decreased risk appetite, and are moving into cash – now 4.4% of an average portfolio, up from 4.1% in May – and reducing exposure to cyclical stocks. Allocations towards Pharmaceuticals, a classic bear market sector, have increased to their highest level since March 2009. A net 39% of respondents admitted to taking lower than normal risks this month.  

The survey was conducted by BofA Merrill Lynch Global Research with the help of market research company TNS. For more information, please visit Merrill Lynch’s Global Research Page or www.bankofamerica.com.