beyondbrics

Here’s a contradiction. Fund manager optimism about emerging market equities is “stratospheric”, according to a new survey from Bank of America-Merrill Lynch, but the same managers increasingly think those same equities are overvalued.

The monthly report, which surveys 194 fund managers with portfolios worth $492bn, showed its highest reading since November 2009 for investors overweight EM equities.

In October, a net 49 per cent of investors were overweight EM, up by 17 percentage points from September, as an expected new round of quantitative easing from the US Federal Reserve helped investors increase their risk appetite.

But one question asks global investors to name the equity region they feel is the most overvalued. And here EM clearly stands out with a net 21 per cent choosing EM followed by US at 11 per cent. Japan was at minus 5 per cent, suggesting investors think it is in fact undervalued, and the UK at minus 8 per cent.

But it gets even more confusing. Another question asks fund managers whether they think EM is overvalued. Here we still have a net 13 per cent saying ‘undervalued’, but two months ago a net 50 per cent said ‘undervalued’.

Confidence in Chinese growth, which is often linked to EM equities, has also increased. A net 19 per cent of managers expect China’s economy to strengthen over the next year, up from a net 11 per cent in September.

But the surge in confidence has not been even. Investors are overweight in specific countries, with Russia, Turkey and Brazil the favoured markets. China, Poland and South Africa, however, saw the biggest falls between September and October.

In terms of the sectoral breakdown in EM, investors extended their overweight bet in the consumer discretionary sector, while increasing the underweight bet on utilities. Other sectors remained neutral.

“While improved risk appetite is to be welcomed, one proviso is just how narrow the investor focus on global emerging equities is at this point,” said Michael Hartnett, chief global equities strategist at BofA-Merrill Lynch.

It comes as all but one the leading EPFR global-tracked equity fund groups posted inflows during the week ending October 13. The Global Emerging Market Equity funds, did particularly well, raking in over $2bn, with Pacific Equity funds having their best week on record.