Global Investors Favor Japanese, U.S. and Russian Equities

But money managers balk at bonds and trim China.
By MainStreet Team ,

By Hal M. Bundrick

NEW YORK (

MainStreet

)--Money managers are increasingly concerned about China, and few are betting on bonds - but in spite of those worries an upbeat attitude tilts towards other pockets of potential profit, according to the latest BofA Merrill Lynch fund manager survey.

More than half (52%) of respondents expect the global economy to strengthen over the next year, but nearly two-thirds (65%) of regional panelists now see China's economy weakening over the same period. An increasing number of managers see a "hard landing" in China as a major tail risk, with over half (56%) ranking it first on this measure -- compared to one-third of respondents a month ago.

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The U.S. and Japanese economies are in favor with these professional money managers, as a majority are now overweight equities, up nine points in two months to a net 52%. A vast majority (83%) favors the U.S. dollar over other currencies, the highest reading yet recorded by the survey.

"With the support of a host of buy signals in recent weeks, the 'Great Rotation' is in full force," says Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. "Our positive view of equities would be further reinforced if the loss of faith in China's growth story turns out to be overdone."

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Meanwhile, the view of the bond market is becoming increasingly negative. A net 55% of fund managers are now underweight fixed-income instruments. Cash holdings have also been padded up to 4.6% of allocations, the highest level in a year.

Global emerging markets are being put in a penalty box, with 44% of institutional investors now viewing GEM countries as offering the worst outlook for corporate earnings of any region - the most negative level yet recorded in the survey. They are similarly unimpressed by the sector's quality of earnings. 18% of fund managers are now underweight GEM equities, a rapid reversal from a net overweight just two months ago and the lowest level recorded in the survey since 2001. An unprecedented 26% expects to underweight GEM equities within the next 12-months.

In the meantime, Russia is attracting increased interest. Half of fund managers specializing in global emerging markets are now overweight the country's equities, up 12 points from last month.

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But Japan takes the headline for positive potential as investors believe the country offers the best outlook for corporate profits of any region. Money managers surveyed expect Japanese companies to achieve double-digit earnings growth over the next year. More than a quarter (27%) of investors are overweight the region, up 10 points from last month, the biggest rise of any major market. That reflects a view that is nearly as positive as towards U.S. equities (up four points this month to a net 29% overweight).

Inflation is increasingly on investors' minds, with 38% of respondents now expecting global core inflation to be higher in one year's time.

--Written by Hal M. Bundrick

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