Sentiment toward developed world equities remains strong, despite growing fears of a hard landing for China’s economy have further marginalised emerging market equities, according to the latest fund manager survey by Bank of America Merrill Lynch.

Sentiment toward developed world equities remains strong, despite growing fears of a hard landing for China’s economy that have further marginalised emerging market equities, according to the latest fund manager survey by Bank of America Merrill Lynch.

The survey revealed that nearly half of respondents (46 per cent) believe that a China hard landing and commodity collapse represents the biggest tail risk to the global economy, compared to 37 per cent in January and 26 per cent in December.

A total of 222 panellists with $591 billion of assets under management participated in the survey from 7 February to 13 February 2014. A total of 175 managers, managing $456 billion, participated in the global survey, while 110 managers, managing $249 billion, took part in the regional surveys.

The survey found that belief in global economic growth has moderated, with 56 per cent of those polled expecting the global economy to strengthen in the coming 12 months, down 19 percentage points from 75 per cent last month.

Global equity allocations are down, with 45 per cent of respondents saying they are overweight equities, down from 55 per cent in January. Average cash balances have increased to their highest level since July 2012 to 4.8 per cent of portfolios, up from 4.5 per cent.

Emerging markets

Regional data showed that concerns are focused on global emerging markets, while optimism towards Europe and the US remains strong.

Allocations to global emerging markets reached a record low with 29 per cent of respondents underweight in the region.

While allocations to global emerging markets reached a record low, allocations to banks by respondents to the global survey have reached a record high. A net 28 per cent said they are overweight banks, a significant swing since January when 16 per cent were overweight.

The number of investors seeking to underweight the region in the coming year has eased slightly, with 24 per cent of global investors saying they would like to underweight global emerging markets in the next 12 months, down from 28 per cent in January.

European equities

Europe has ranked as the most preferred region for six months and belief continues to grow in Europe’s profit outlook.

The survey revealed that 40 per cent of the respondents believe Europe is the region they would most like to overweight over the coming 12 months.

A net 12 per cent of the global panel said that Europe is the region in which the profit outlook appears the most favourable, up from 8 per cent a month ago.

Within Europe, 70 per cent of respondents to the regional survey expect better profits in the year ahead, up from a 59 per cent last month, while 11 per cent of respondents are overweight the US, up from 5 per cent last month.

“Investors remain firmly bullish towards developed markets and Europe in particular. But we would caution that current valuations in Europe already fully price in the region’s growth outlook,” said John Bilton, European investment strategist.

While cash levels accumulate in investors’ portfolios, the survey shows a new record number of investors demanding corporates put their cash to work in the real economy.

According to the survey, the proportion of investors saying that companies are under-investing has climbed to 69 per cent, up 2 per cent from last month.

The spread between investors wanting corporate to increase capital expenditure rather than return cash to shareholders remains at a record high, with 58 per cent of investors wanting to see more capital expenditure, while 25 per cent opt for dividends and buybacks, a spread of 33 percentage points.