Investors are positioning themselves for slower growth in China and prolonged low inflation, sending commodities allocations to a four-year low, according to the latest fund manager survey by Bank of America Merrill Lynch.

The survey revealed that a quarter of respondents believe a hard landing in China and a commodity collapse is their number one “tail risk”, an increase from 18 per cent in April.

A net 8 per cent of fund managers in Japan, Asia-Pacific rim and global emerging markets expect China’s economy to weaken over the next 12 months, compared with a net 9 per cent saying it would strengthen a month ago.

A total of 231 panellists with $661 billion of assets under management participated in the survey from 3 May to 9 May. A total of 177 managers, managing $517 billion, participated in the global survey. A total of 109 managers, managing $248 billion, participated in the regional surveys. The survey was conducted by BoA Merrill Lynch Research with the help of market research company TNS.

Meanwhile, panellists see little threat of inflation. A net 30 per cent expect global core inflation to rise over the coming year, down from a net 45 per cent last month. Accordingly, the proportion of investors expecting short-term interest rates to rise has fallen to a net 14 per cent from a net 32 per cent in April.

“May’s fund manager survey demonstrates a clear exit from China and assets connected to China - in the shape of commodities and emerging market equities. But it’s worth noting that investors are keeping faith in global growth,” said Michael Hartnett, chief investment strategist at BoA Merrill Lynch Global Research.

Optimism in eurozone

In contrast, signs of optimism towards Europe are emerging from respondents and global investors are starting to view the eurozone as less of a problem and more of an opportunity. The number of respondents naming EU sovereigns and banks as number one tail risk has dropped to 29 per cent from 42 per cent.

A net 38 per cent of the global panel takes the view that eurozone equities are undervalued - a significant increase from a net 23 per cent in April. With more investors viewing the US as overvalued, the “valuation gap” between the US and the eurozone has widened even further in the past month.

European respondents to the regional survey are more positive about growth than a month ago. A net 24 per cent of European fund managers believe Europe’s economy will strengthen in the coming year, up from a net 19 per cent in April. A net 17 per cent predict that earnings will improve in the next 12 months, up from a net 14 per cent. At the same time, a net 31 per cent of regional investors say that fiscal policy is too restrictive, up from a net 19 per cent last month.

Confidence in Japan soars

Allocations to Japanese equities are at their highest since May 2006, with a net 31 per cent of global asset allocators overweight Japanese equities. That is a sharp increase from a net 20 per cent overweight in April. 

A net 44 per cent of global investors say that the outlook for corporate profits is more favourable in Japan than in any other region - the most bullish outlook captured by the survey since November 2005. Japan also remains the region that investors would most like to overweight over 12 months. A net 25 per cent say Japan is at the top of their overweight list, in line with April’s reading.

Pay out

With the prospect of corporate profits rising, investors are pushing the case for companies to pay out some cash. A net 27 per cent of the global panel says that pay out ratios (including share buybacks and dividends) are too low, a rise of six percentage points month-on-month.

Meanwhile, 38 per cent say that their preferred use of cash flow would be to return cash to shareholders via buybacks, dividends or acquisitions, up from 34 per cent in April. The survey also showed that 47 per cent of respondents would like companies to increase capital spending, up 1 per cent month-on-month, while only 9 per cent are prioritising debt repayment.