China Drives Rise In Investor Optimism - Merrill Survey

Tom Burroughes

19 February 2009

Fresh optimism over China’s growth prospects has led to a marked improvement in economic sentiment globally, according to the Merrill Lynch survey of fund managers for February.

Investors are at their most hopeful about the year ahead since the credit crunch took hold in July 2007, with the number who forecast a worsening economy in the 12 months ahead falling to a net -6 per cent. This compares with a net -24 per cent in January. The majority recognises, however, that the world economy is in recession.

Fears of a prolonged slowdown in China appear to be fading. The number of investors who predict lower growth in China over the coming 12 months has fallen sharply, to a net 21 per cent in February from a net 70 per cent in January.

Similarly, severe pessimism about the outlook for corporate earnings has started to ease. A net 43 per cent of respondents expect to see deteriorating profits over the coming year, significantly lower than the 63 per cent who held that view in December. A net 49 per cent of the panel predicts inflation will fall over the coming 12 months, compared with 64 per cent in January and 82 per cent in December.

“Fund manager expectations for Chinese economic growth rose dramatically to their highest levels since 2007, and faint global decoupling hopes now reside solely with China,” says Michael Hartnett, chief Global Emerging Markets Equity strategist at Banc of America Securities-Merrill Lynch Research.

Commodities, meanwhile, have enjoyed the sharpest pick-up in terms of changes to asset allocations in the past two months. Investors hold a net 15 per cent underweight position in commodities, down from a net 32 per cent underweight in December.

Bond weightings were trimmed while equity allocations fell back to a net 34 per cent underweight – the same position as in December. Investors have been pruning back their allocations to traditional defensive sectors and moving into more cyclical sectors.

Appetite for US equities has been reawakened in February. The net overweight position in US equities has risen to 15 per cent this month, up from 7 per cent one month ago.

At the same time allocations to Japan have fallen starkly with investors who hold a net underweight position at 26 per cent, compared to 15 per cent in January. Traditionally, Japanese equities would benefit from a broad pick-up in sentiment. Japan also suffers from having an overvalued major currency, according to the survey.

A total of 212 fund managers, managing a total of $599 billion, participated in the global survey from 6 February to 12 February.

The survey was conducted by Banc of America Securities – Merrill Lynch Research with the help of market research company Taylor Nelson Sofres.