Market Research

Emerging Markets Flavour Of The Month As Investors Cool On Stocks - BoA Merrill Lynch

Mark Shapland Reporter London 16 April 2014

Emerging Markets Flavour Of The Month As Investors Cool On Stocks - BoA Merrill Lynch

Emerging markets are officially back in fashion as fears spread among investors that US stocks are currently in a bubble, according to the Bank of America Merrill Lynch fund manager survey for April.

Emerging markets are no longer as unloved as before due to how developed markets, especially the US equity market, is seen as overvalued, according to the Bank of America Merrill Lynch fund manager survey for April.

The survey showed that 12 per cent of investors now believe global stocks are overvalued - a level not seen since July 2000 when the last dotcom bubble was in full swing. A net 66 per cent of global fund managers believe the US is still the most over-valued equity market; investor fears have been stoked by the fact that the US stocks have been on a five-year bull market run with the S&P 500 index up by 173 per cent from its trough on March 9, 2009.

Sentiment in the UK stock market has also cooled. For the first time in eight months, investors have been underweight on UK equities. There are particular question marks over UK technology stocks, which have seen their valuations shoot up in recent months, based on optimistic growth predictions rather than underlying business fundamentals.

As a result, investors are once again looking to the emerging markets and value over growth stocks. It comes just two months after weak economic data from China triggered a huge emerging market sell-off and resulted in the MSCI Emerging Markets Index falling by 6.4 percent in February. Emerging markets have fallen out of favour in recent months amid heightened belief that the US Federal Reserve will reduce its quantitative easing programme.

However, global investors have reduced their extreme underweight position in emerging market equities; they are now a net 13 percent underweight from net 31 percent underweight in March. Meanwhile a net 40 percent in April believed value stocks will outperform growth stocks over the next 12 months, more than triple the level in March and an all-time high.

“Recent market volatility has led investors to ‘taper’ their extreme bullishness on US growth-plays and extreme bearishness on emerging markets,” said Michael Hartnett, chief investment strategist at BoA Merrill Lynch Global Research.

China and Russia are the two most significant emerging market players to rebound this month as investors put political risks aside. China growth expectations bounced off 9 month lows, while investors have cut their extreme underweight positions. Yet it is India that has recorded the most substantial turnaround this month - going from a net 13 per cent underweight to a net 44 per cent overweight.

JP Morgan Asset Management also backs these findings and has stuck its neck out, predicting that emerging markets will bounce by 10 per cent or more in the coming 12 months.

“Given emerging markets are approaching their lowest levels in over five years, history suggests that investors can expect reasonable returns going forward, especially relative to developed market equities,” Richard Titherington, chief investment officer, emerging markets equities, JP Morgan Asset Management, said in a note earlier this week.

But not all emerging market countries have won investor confidence back. Brazil and Turkey have not seen substantial improvements in current account balance and this has resulted in investors maintaining large underweight positions in April. Political uncertainty with local elections in Turkey last month and an upcoming general election in Brazil could be further reason for them remaining out in the cold.

Yet perhaps the most disappointing country is still Japan. The boost provided by the launch of “Abenomics” over a year ago has waned. Only a net 13 per cent of investors are still overweight Japanese equities, down from 16 per cent in March and 30 per cent in February. Similarly, a net 16 per cent have a favorable outlook for Japanese profits, down from 18 per cent in March and 28 per cent in February while perceptions of their quality and volatility turn for the worse.

The economic data coming out of the country remains weak with the country’s fourth quarter GDP recorded at just 1 percent against an expected 2.8 per cent. It is probably to early to call “Abenomics” a failure but it is certainly on the ropes.

Overall expectations for global economic growth remain high. A bullish 62 per cent of investors believe the economy will grow over the next 12 months - unchanged from March and above the 56 per cent recorded in February.  At the same time a net 44 per cent of investors believe profits will improve over the next 12 months, up from 40 percent in March.

An overall total of 239 panelists with $674 billion of assets under management participated in the survey.

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