The Bank of America Merrill Lynch emerging markets and Asia fund manager survey showed that just a net 3% of investors reported overweight positions on emerging market stocks, as the outlook for China's economic growth turned negative for the first time since March last year.
"Such bearish sentiment toward EM has historically coincided with outperformance of emerging market equities versus developed markets," BofA Merrill Lynch strategists Swathi Putcha, Michael Hartnett and Brian Leung wrote in research accompanying the release of the survey's results.
"Potential catalysts for a rally include China stimulus and/or accelerating growth; signs of rotation from emerging market debt to equity; or oil prices breaking to the upside from their trading range of recent quarters," they added.
Investors were also bearish on commodities, with 29% being net underweight the asset class, the lowest allocation level since December 2008.
Because of this, commodity importers in Asia were favoured to Latin American commodity exporters, the survey, to which 109 participants with $248 billion worth of assets under management responded, showed.
Sentiment towards India improved "notably" in May, with 38% saying they were net overweight compared with 27% underweight in April. Investors are also bullish on Indonesia, in which 44% are overweight.
Exposure to Mexico, where 19% are underweight, and to Brazil, with 31% underweight, was cut most significantly this month, according to the survey.
A separate survey of investors, carried out by Societe Generale, showed that 61% of investors were bullish on global emerging markets over a 3-month horizon in April, higher than in March but still low by historical standards. Emerging market local debt was the preferred asset class, followed by hard currency debt. Foreign exchange was "a distant third," while emerging market investors seemed to "particularly dislike" equities.
BULLISH ON JAPAN
The BofA Merrill Lynch global fund manager survey – to which 177 participants with $517 billion worth of assets under management responded – showed that Japan bulls outnumber emerging markets bulls by the widest margin since December 2005.
Allocation to Japanese stocks increased for the 7th consecutive month to net 31% overweight, a 7-year high. However, allocation is still half of its peak of 61% in December 2005, the BofA Merrill Lynch strategists noted.
Allocation to US stocks remained unchanged at net 20% overweight, while allocation to eurozone equities was also flat at net 8% underweight for the second straight month.
In terms of sectors, there was a "notable rotation into value plays" such as banks, insurance and utilities and a "modest reduction" in cyclical sectors like discretionary and industrials. Pharmaceuticals and technology remained the most popular sectors globally.
There was a record underweight position in global energy, just like last month.
When asked what they considered to be the biggest "tail risk," investors mentioned the sovereign and banking crisis in Europe as their main worry. But the risk of a hard landing in China was on the second place, as well as that of a collapse in commodity prices.
A geopolitical crisis risk came in third, while fourth was the risk of failure of "Abenomics."
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