Investment Pros Embrace China, Emerging Markets

SAN FRANCISCO (MarketWatch) — Risk is in vogue again. A survey released on Tuesday shows fund managers are increasingly embracing emerging-markets assets, spurred by expectations for greater liquidity in the global financial system.

A net 49% of investors are overweight on emerging market assets, up 17 percentage points for the month, while interest in U.S., Eurozone and Japanese equities remained stable, Bank of America Merrill Lynch said.

“The level of risk that investors are taking in their portfolios rose more sharply than in any month since April 2009,” said Bank of America Merrill Lynch in a statement.

Fund managers are also more optimistic about China, with a net 19% expecting China’s economy to grow in the next 12 months, up from a net 11% who felt that way in September and a significant 38 percentage points above August’s figure.

Earlier Tuesday, the Chinese central bank raised its key one-year lending and deposit rate by 0.25 percentage points in a bid to dampen inflationary pressure and slow down inflow of “hot money,” China’s official Xinhua news agency reported. The rate hike is the first since December 2007 and goes into effect on Oct. 20.

China’s economy is forecast to grow 10.5% this year and then slow to 9.6% expansion in 2011, the International Monetary Fund said earlier this month.

“While improved risk appetite is to be welcomed, one proviso is just how narrow the investor focus on GEM (global emerging market equities) is at this point,” said Michael Hartnett, chief global equities strategist at Bank of America Merrill Lynch Global Research, in a statement.
Confidence in developed markets lags

In contrast, the survey showed a notable absence of confidence in U.S. and Eurozone equities.

A net 4% of fund managers are underweight the U.S., while a net 3% are overweight the Eurozone. Managers are now neutral on U.K. equities from being underweight last month. At the same time, they were more bearish about Japan.

“These positions reflect notable uncertainty over the direction of the dollar and the euro. While growing numbers of investors believe the U.S. dollar is undervalued, the prospect of quantitative easing in the U.S. is countering potential dollar appetite and raising expectations of inflation,” the survey noted.

A net 45% of fund managers now see the U.S. dollar as undervalued, up from 18% last month. But only a net 12% of respondents expect the U.S. dollar to gain against major currencies over the next 12 months.

The U.S. dollar jumped 1.4% against a basket of currencies on Tuesday in response to China’s tighter monetary policy.

Aside from emerging markets, there is a clear sign of a broader rise in risk appetite, the survey showed.

Demand for commodity exposure rebounded with a net 17% of the panel overweight in October, sharply up from a net 4% in September. Still, a net 24% of the panel viewed gold as being overvalued. Read the gold report.

Fund managers were also more confident about corporate profits and want to see companies being more aggressive about investing in their businesses, returning excess cash to shareholders and raising more debt.

A total of 194 fund managers, managing a collective $492 billion, participated in the global survey, according to Bank of America Merrill Lynch.