Investors have upped their holdings in emerging markets to record levels while pulling back on US exposure, according to the latest fund manager survey by Bank of America’s (BofA) global research team.
The report, based on a poll of 194 investors managing around $560 bn in assets, says allocations to emerging market equities rose 7 percentage points over the last month to a net 62 percent overweight – the highest ever reading.
Emerging markets – particularly China – are expected to benefit this year from strengthening economies, low interest rates and the weak dollar. Underlining investor bullishness, this week the MSCI Emerging Markets Index hit an all-time high.
‘Two thirds of investors say emerging markets will be the top-performing asset in 2021,’ write strategists in the BofA Global Research team.
Meanwhile, sentiment toward the US stock market has declined, says BofA. Since December, investor allocations to the region have fallen by 11 percentage points to a net 4 percent overweight.
Investors looking to the US must weigh the impact of further fiscal stimulus – president-elect Joe Biden plans a $1.9 tn package – alongside the potential for higher taxes and regulation under the Biden administration. Sky-high valuations, especially among tech stocks, are also giving fund managers pause for thought.
Broadly, global investors remain in a bullish mood with cash levels sitting on average at 3.9 percent, the lowest level for seven years, notes BofA. In fact, the bank says such a low cash position is a contrarian sell signal given market history.
On balance, investors say companies should continue to focus on shoring up the balance sheet over spending on capital expenditure, although the two options are close to swapping places in BofA’s survey. Only around 10 percent of fund managers would like to see free cash flow returned to shareholders before other options.
Survey respondents also gave their thoughts on the impact of a Biden presidency. They think his main focus in his first 100 days in office will be healthcare, followed by infrastructure and inequality.
The most likely solution to the US debt burden – which currently stands at around 100 percent of GDP – is higher taxes, with inflation coming second, according to the survey.
Janet Yellen, who is nominated as the next US Treasury secretary, said at her confirmation hearing yesterday that policymakers should not back away from major stimulus, despite the high level of national debt.
‘Neither the president-elect, nor I, proposed this relief package without an appreciation for the country’s debt burden,’ she said in a prepared statement.
‘But right now, with interest rates at historic lows, the smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs, especially if we care about helping people who’ve been struggling for a very long time.’