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bofaml china is biggest contrarian play

Expectations for Chinese growth have collapsed this year, after hitting a record survey high in December 2012. A net 31% of fund managers now forecast a weakening of China’s economy over the next year – the lowest sentiment reading recorded by BofA Merrill Lynch since October 2011.

In addition, about one-third of survey participants say a Chinese hard-landing and commodity price collapse is the biggest “tail risk” for investors – ahead of a failure of Japan’s “Abenomics” experiment (21%), and a worsening of the European Union sovereign debt/banking crisis (14%).

As a result, a net 32% of fund managers are underweight commodities – an all-time survey low – and 9% are underweight emerging market stocks, down from a net 3% overweight in May. In contrast, survey participants are overweight US, eurozone and Japanese equities.

“The biggest contrarian play in the market today is assets linked to China,” wrote Michael Hartnett, the chief investment strategist at BofA Merrill Lynch Global Research. “The lows in emerging market equity and commodity allocations suggest the market has over-positioned itself for a shock from China.”

Consumption growth a ‘multi-year’ trend

Managers such as Didier Rabattu, head of global equities at Lombard Odier Investment Managers, have already taken advantage of lower Chinese stock prices. Rabattu recently topped-up the China allocation in his Emerging Consumer Fund, and is upbeat on the outlook for consumer stocks.

“The growth in domestic consumption is a multi-year, even a multi-decade trend,” Rabattu wrote this month. “We are looking to invest in the Chinese equivalents of stocks like Coca Cola – retail or [fast-moving consumer goods] companies that are well-managed and number one or two in their categories, and which will reap the benefits of consolidation, infrastructure improvements, consumer trends and rising disposable incomes, year after year.”

The Bank of America Merrill Lynch Fund Manager Survey gathered responses from 248 participants with $708bn (€538bn) in assets under management, between 7 June and 13 June, 2013. A PDF of the global survey can be downloaded from the Bank of America Merrill Lynch website, here.

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