Fund managers look to China

The U.S. Congress may have passed its stimulus package, with another plan in the works for homeowners, but it is renewed optimism about China’s economic growth that is most exciting to fund managers, according to a report from Merrill Lynch.

The February edition of the Merrill Lynch Survey of Fund Managers shows hopes at their highest since the credit markets started to come undone in July 2007.

While the majority of managers surveyed recognize that the global economy is in recession, the percentage who expect the next 12 months to be worse has declined to 53%, from 62%.

Optimism toward Chinese growth improved even more, though. In January, 85% of respondents expected lower growth over the coming 12 months. That has now fallen to 60.5%.

“Fund manager expectations for Chinese economic growth rose dramatically to their highest levels since 2007, and faint global decoupling hopes now reside solely with China,” says Michael Hartnett, chief global emerging markets equity strategist at Banc of America Securities-Merrill Lynch Research.

Renewed optimism for China’s economy spells hope for commodity prices, and surveyed managers now hold a net 15% underweight position in commodities, compared to a net 32% underweight in December.

Weightings in telecoms, insurance, consumer staples and utilities have all declined, as have fixed-income holdings. Tech, energy, materials, industrials and consumer discretionary allocations have all risen.

“Higher risk appetite, rising commodity sentiment and a strong valuation case could encourage further investment in energy and materials sectors,” said Gary Baker, Banc of America Securities-Merrill Lynch head of EMEA Equity Strategy. “We see this as best played out through sterling-denominated assets.”

The outlook for corporate profits has also come off a bottom; now only 71.5% expect deterioration, compared to 81.5% in December. Fears of disinflation are also waning, with 74.5% expecting inflation will fall, compared to 82% in January and 91% in December.

American stocks are starting to attract attention once more, with net overweight positions rising to 15%, from 7% in January. Thirty-one percent of respondents said they want to overweight U.S. equities over the coming 12 months.

In total, 212 fund managers, managing a total of US$599 billion, participated in the global survey from 6 February to 12 February.

(02/19/09)