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Emerging markets allocation hits dangerous level

Asset allocators have almost doubled the size of their overweight position to emerging markets, reaching a level which has historically coincided with short-term underperformance, according to the Bank of America Merrill Lynch (BofA ML) fund manager survey for February.

As risk appetite returned to more normal levels in February, global managers upped their weightings to emerging markets from a net 20 per cent overweight in January to a net 44 per cent overweight, according to the survey. This represents the second biggest jump in the region in the past 12 years, following an improvement in sentiment towards the prospects for the global economy in the coming year.

In February, a net 11 per cent of global managers predicted the global economy will strengthen in the coming 12 months, up from the net 27 per cent who predicted a worsening economy in December.

BofA ML global research head of European equities strategy Gary Baker says historically such a large shift in sentiment towards emerging markets can be seen as a contrarian trade and perhaps a sign the sector has got too far ahead of itself.

With cash balances falling and allocations to equities rising, Baker describes February’s survey as managers taking off the ’risk off’ trade, although not yet to a level that can be described as ’risk on’.

He says: “The strongest indication of risk appetite is investors’ definitive move into cyclicals from defensive stocks and the closing of underweight positions in banks, especially in Europe.”

In the European survey, banks saw a 38 percentage point swing in their weighting in February, which is the third biggest shift since the survey started. 12 per cent of European investors are underweight banks, compared to 50 per cent a month ago. Meanwhile the autos sector hit its biggest overweight, with a net 20 per cent of investors overweight, up from 18 per cent last month.

The large bellwether defensives meanwhile fell out of favour, Baker says, with healthcare falling by 30 percentage points to a net 18 per cent underweight, its third largest ever one month fall.

Globally, technology remains the most favoured sector, hitting a level, like emerging markets, which Baker describes as dangerous.


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