The Bank of America Merrill Lynch fund manager survey revealed that 34 per cent of respondents were overweight in American equities in February. This was up from 27 per cent in January and 16 per cent in December.
Over the same timespan, there were big outflows from emerging markets, induced partly by the political uncertainty in the Middle East. These events added to already nervous emerging market investors who are anticipating high inflation throughout Asia and a potential bubble in China.
Emerging market outflows leave a surplus of cash to be invested. Tim Cockerill, the head of fund research at Rowan and an Adviser Fund Index panellist, says investors are looking at the developed world for the best opportunities.
“Investors pulling out of emerging markets have two good options between the eurozone and America. As the US seems to be recovering faster, this may explain why it is experiencing these inflows,” he says.
The British Government’s spending cuts and public sector job losses will likely put a strain on the economy. The eurozone still has some banking problems to overcome before it could be considered safe, so investors have almost gravitated to the US by default.
Cockerill is following the broader consensus in reallocating away from emerging markets and into the developed world. He has holdings in the Thread- needle American and Schroder US mid-cap funds.
Choosing where to invest was made easier when the British and American GDP figures were released in February.
Britain experienced an unexpected 0.6 per cent contraction in its GDP in the fourth quarter of 2010. The decline was blamed on the poor weather that occurred during the run-up to the busy Christmas period and although this clearly had an effect, the results also reflect the fragile state of the British economy in general. In contrast, the US’s GDP grew by 2.8 per cent over the same period.
As the Middle East unrest continues to develop, an increasing amount of money is clearly flowing towards US equities. However, Chelsea Financial Services Darius McDermott managing director says changes are incremental.
He says: “We are not ready to discard emerging market weightings in favour of US equities. Looking at our top 20 funds, the only change is that we currently hold the Neptune US opportunities fund. This time last year, that was not the case.”
The speed of events in the Middle East will have an effect on emerging market outflows and the full impact of the crisis on economic markets is yet to unfold. It remains to be seen if investors will rush back to buy up valuable commodities stocks as oil and gold prices soar.