China Slow-Down Compounds Emerging Market Fears

(July 17, 2013) — Investors are continuing to abandon China, as the economy and trade exports continue to droop.

Bank of America Merrill Lynch’s monthly global research report found 65% of its panelists believed China’s economy will weaken over the next year.

In addition, 56% of fund managers cited a “hard landing” for the country being its major risk, up from a third a month ago.

China’s second quarter GDP growth came in at 7.5% year on year, down from 7.7% in the first quarter.

Exports unexpectedly contracted by 3.1% year on year in June, the first contraction since January 2012 and the biggest since late 2009.

Exports to the US declined 5.4% year on year, compared with -1.6% in May; shipment to the European Union remained in deep contraction (down 8.3% year on year); and Japan’s demand failed to recover (down 5.1% year on year), despite a much weaker base.

Import growth also came in well below expectations, falling 0.7% year on year in June, compared to a fall of 0.3% in May. By contrast, import growth from both the US and the EU turned positive.

Not everyone’s convinced the fund managers are taking the right tack however. Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch Global Research, noted he thought the “loss of faith in China’s growth story” could turn out to be “overdone”.

Elsewhere, Raiffeisen Capital Management said in an investor note that the June price slump made Chinese equities more attractive.

“Chinese equities are still beset by downside risks, in spite of the weak price trends in recent years,” the July note said.

“Nevertheless, in the coming weeks and months we could see the Chinese equity markets bottom out. The markets certainly expect little of Chinese companies just now, and some of the valuations are very attractive.

“This means we could be set for some positive surprises, which could trigger a strong price rally – and potentially signal the start of a new and sustained upwards trend. Our fundamental outlook for Chinese equities is becoming increasingly brighter.”

The anti-China effect is also spilling over into general global emerging market (GEM) funds: Bank of America Merrill Lynch’s global report found 44% of fund managers now view GEM countries as offering the worst outlook for corporate earnings of any region, the most negative level yet recorded in the survey following an 18 percentage point decline from last month.

Furthermore, 18% of fund managers are now underweight GEM equities, down from a net overweight just two months ago, and the lowest level recorded in the survey since 2001. An unprecedented 26% expects to be underweight on GEM equities on a 12-month basis.

The only country to buck the trend was Russia: 50% of specialist GEM fund managers are now overweight the country’s equities, up 12 points from last month.

Where has all the positive sentiment gone? Into developed economies, particular the US and Japan.

Confidence in the US was illustrated by 83% favoring the dollar over other currencies, the highest reading yet recorded by the survey.

And with Japan, all regional fund managers surveyed expect companies to achieve double-digit earnings growth over the next year.  

Appetite for Japanese equities has soared–July’s net 27% overweight is up 10 points from last month, the biggest rise of any major market.

There was also evidence of a potential buying season on the cards, with cash holdings rising to 4.6%, the highest level recorded all year. In addition, 55% of fund managers confessed to being underweight in fixed income instruments.

Perhaps the adage of “sell in May and go away, don’t come back until St Ledger’s Day”, which usually falls in mid-September, is at work here.

A total of 238 panelists, including 178 managers, with $643 billion of assets under management participated in the survey from 5 July to 11 July.

Related Content: Bulls Become a Little More Bearish and Why North Dakota Could be the Next Emerging Market