INSUBCONTINENT EXCLUSIVE:
LONDON: Investors made a U-turn on emerging markets, naming them the most crowded trade, in Bank of America Merrill Lynch's survey for the
first time in its history.
This marked a big reversal from last month, when fund managers said "short EM" was the third most-crowded trade -
showing how fast the mood can shift in an uncertain market.
It could prove to be a bad omen for emerging markets, though, as assets named
"most crowded" usually sink soon afterwards.
Previous "most crowded" trades have included Bitcoin, and the United States FAANG tech stocks,
which led the selloff in December.
Emerging-market stocks are up 7.8 percent so far this year, and flow data on Friday showed investors
pumped record amounts of money into emerging stocks and bonds.
Emerging-market assets had a torrid 2018
Crises in Turkey and Argentina ripped through developing countries already suffering from a strong dollar and rising United States yields
pushing up borrowing costs.
But a dovish turn by the Fed at the start of the year, indicating the world's top central bank would not raise
interest rates as quickly as previously expected, sparked fresh enthusiasm among investors.
Major asset managers and investment banks such
as JPMorgan, Citi and BlueBay Asset Management ramped up their exposure to emerging markets in recent weeks
The Institute of International Finance (IIF) predicted a "wall of money" was set to flood into emerging market assets.
However, there are
some indications momentum may be waning
Analysing flows of its own clients, investment bank Citi noted they had turned cautious on emerging-market assets over the last week, with
both real money and leveraged investors pulling out funds following four weeks of inflows.
BAML did not specify whether the "long EM"
crowded trade referred to bonds, equities or both.
Outside emerging markets, investors' main concern remained the possibility of a global
It topped the list of biggest tail risks for the ninth straight month, followed by a slowdown in China, the world's second-largest
economy, and a corporate credit crunch.
Overall, BAML's February survey - conducted between Feb
1 and 7, with 218 panelists managing $625 billion in total - showed investor sentiment had hardly improved
Global equity allocations fell to their lowest levels since September, 2016.
"Despite the recent rally, investor sentiment remains bearish,"
said Michael Hartnett, chief investment strategist at BAML.
SECULAR STAGNATIONInvestors remained worried about the global economy, with 55
percent of those surveyed bearish on both the growth and inflation outlook for the next year.
"Secular stagnation is the consensus view,"
BAML strategists wrote.
Following this theme, investors were most positive on cash and, within equities, preferred high-dividend-yielding
sectors like pharmaceuticals, consumer discretionary, and real estate investment trusts.
As investors added to their cash allocations, the
number of fund managers overweight cash hit its highest level since January, 2009.
The least preferred sectors were those sensitive to the
cycle, like energy and industrials - which BAML strategists see as good contrarian investments if "green shoots" appear in the global
economy.
Worries about corporate debt were still running high, with this month's survey showing a new high in the number of investors
demanding companies reduce leverage.
Some 46 percent of fund managers find corporate balance sheets to be over-leveraged, the survey found,
and 51 percent of investors want companies to use cash flow to improve their balance sheets
That's the highest percentage since July 2009.
Europe, one of investors' least-favoured regions, showed a slight improvement
A net 5 percent reported being overweight euro zone stocks, from 11 percent underweight last month.
But investors' reported intention to own
European stocks in the next year dropped to six-year lows as the profit outlook for the region continued to lag.
Allocations to UK stocks
increased slightly from last month but the UK remained investors' "consensus underweight", BAML said
It has been so since February 2016.
