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Sep 16, 2015

Investor confidence drops on China and emerging market fears

Buy side wants companies to improve balance sheets rather than raise dividends, says BofAML survey

Global investor confidence has deteriorated amid concerns about the outlook for China and the world’s emerging markets, according to the latest investor survey by Bank of America Merrill Lynch (BofAML).

Investors’ appetite for risk fell sharply in early September from a month earlier, with investors overweight equities declining by a net 24 percent, BofAML says in its September survey of 214 investors. At the same time, investors have increasingly shorted commodities.

About 52 percent of those surveyed say a recession in China is now the top ‘tail risk’ for the global economic outlook, followed by a crisis in emerging market debt. Investor expectations for global growth, profits and inflation all dropped in September from a month earlier.

The number of investors saying they want companies to improve their balance sheet instead of raising dividends or capital expenditure also jumped sharply from August, which is likely a ‘reflection of default fears picking up,’ BofAML says.

‘Investors were already positioned for lower growth in China and emerging markets, but their risk-off stance has intensified,’ says Michael Hartnett, chief investment strategist at BofAML, in a press release announcing the results of the survey. ‘Contrarians will be noting the aggressive underweight positioning in emerging markets.’

The survey, taken from September 4 to September 10, also shows that investors sold equities, debt and commodities and boosted their cash positions to 5.5 percent of their portfolios, the highest level since the financial crisis of 2008. More than a third of asset allocators are now overweight cash.

The most ‘crowded trade’, according to the survey participants, was long the US dollar, BofAML says, followed by short emerging markets equities, short commodity stocks and short emerging markets foreign exchange.