Commodities allocations have dropped to a four-year low, as investors anticipate slower growth in China and prolonged low inflation, according to the latest BofA Merrill Lynch Fund Manager Survey.
The survey found that a quarter of respondents say that a hard landing in China and a commodity collapse is their number one ‘tail risk’, up from 18% in April. At the same time, investors see little threat of inflation, it notes, with a net 30% expecting global core inflation to rise over the coming year, down from 45% last month. And, the proportion of investors expecting short-term interest rates to rise is down to a net 14% from 32% in April.
It says that investors have responded by reducing allocations to commodities and emerging markets and upping allocations to bonds. As a result, a net 29% of global asset allocators are underweight commodities, it reports, up from 11% in March. And, a net 17% of asset allocators remain underweight energy stocks, it adds.
Additionally, the proportion of global investors that are overweight emerging market equities has plummeted to a net 3% from 34% in March, it says. And, a net 38% is underweight bonds, down from 50% in April.
“May’s fund manager survey demonstrates a clear exit from China and assets connected to China – in the shape of commodities and emerging market equities. But it’s worth noting that investors are keeping faith in global growth,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
Conversely, the firm says that the survey shows fledgling signs of optimism towards Europe. “Global investors are starting to see the eurozone as less of a problem and more of an opportunity,” it notes, adding that the percentage of the panel naming EU sovereigns and banks as number one ‘tail risk’ has dropped to 29% from 42%. And, a net 38% now takes the view that eurozone equities are undervalued, up from 23% in April.
Belief in the bull run in Japanese equities also remains strong, it says, noting that allocations to Japanese equities are at their highest since May 2006, with a net 31% of global asset allocators overweight Japanese equities, up from 20% in April.
The survey also found that investors want to see companies pay out more cash. A net 27% says that payout ratios (including share buybacks and dividends) are too low, it says; and, 38% say that their preferred use of cash flow would be to return cash to shareholders via buybacks, dividends or acquisitions, 47% would like companies to increase capital spending, only 9% are prioritizing debt repayment.
An overall total of 231 panelists, with US$661 billion of assets under management, participated in the survey from May 3 to 9.