Fund managers were a net 29 percent overweight emerging markets, a swift turnaround from the net 10 percent underweight seen last September
The Bank of America-Merrill Lynch survey of global fund managers finds a return of risk appetite for emerging market equities in January. Fund managers were a net 29 percent overweight emerging markets, a swift turnaround from the net 10 percent underweight seen last September. Emerging markets are now the region of choice for investors.
That said, global growth fears are very strong, with a majority of investors expecting global growth to slow in the next 12 months, although most think a recession is unlikely. Investors are saying that a ‘secular stagnation’ environment is most likely in the next two-or-three quarters. With lower global growth, inflation expectations too have declined, allowing investors to discount a dovish Fed. That is why they now think the dollar is very overvalued, the most since June 2002, while they also think emerging market currencies are the cheapest since October 2004.
That sets the stage for a rally in emerging markets. Note that allocation to emerging markets is still 0.4 standard deviations below its long-term average. However, a slowdown in China remains a major risk.
