Record Number Of Fund Managers Overweight On Emerging Markets, Says BofA Survey
An electronic board displaying the Jakarta Composite Index figure is seen reflected on a glass window inside the Indonesia Stock Exchange. (Photographer: Dimas Ardian/Bloomberg)

Record Number Of Fund Managers Overweight On Emerging Markets, Says BofA Survey

A record number of fund managers are bullish on emerging markets and expect them to be the best-performing asset in 2021 as the global economy enters an early growth cycle and corporate profits rise.

62% of the 217 fund managers overseeing $596-billion assets are overweight on emerging markets, according to a survey conducted by BofA Securities between Jan. 8 and 14. Allocation to emerging market equities increased 7 percentage points month-on-month to its highest ever.

Overseas investors have been piling into emerging markets like India as the global economy is awash with easy money after central banks injected liquidity during the pandemic. Equity markets across the globe are optimistic that the U.S. fiscal spending will revive growth. The S&P 500 index on Jan. 20 saw its best first-day reaction to a presidential inauguration since at least 1937.

Low Cash Levels

Fund managers are now deploying more cash in equities. Cash levels fell to 3.9% in January — the lowest since March 2013. A reading less than 4% indicates greed and over 5% fear.

There are, however, risks. The fund managers surveyed consider a tantrum in the bond market as the second-biggest risk to equities after the rollout of a Covid-19 vaccine. A bubble on Wall Street and rising inflation expectations are other risks.

Record Number Of Fund Managers Overweight On Emerging Markets, Says BofA Survey

Here are five key takeaways from the survey:

Yield Curve

A record 83% of the panelists surveyed by BofA Securities expect a steeper yield curve. The participants expect the yield curve to be higher than levels seen during the 2008 Lehman bankruptcy, 2013 Fed taper tantrum and 2016 U.S. presidential elections.

Record Number Of Fund Managers Overweight On Emerging Markets, Says BofA Survey

Goldilocks Consensus Has Peaked

The expectation of above-trend growth and below-trend inflation—Goldilocks Consensus—has peaked. The number of fund managers expecting this trend has fallen to 41% in January 2021 from 47% in November 2020.

Record Number Of Fund Managers Overweight On Emerging Markets, Says BofA Survey

Asset Allocation

The January survey showed that fund managers’ optimism on the prospects of emerging markets is on the rise, and so is the pessimism for the U.S. equities.

Optimism of fund managers on global equity allocation also rose to the highest since January 2018 (net 53%). A reading above 50%, according to BofA Securities, indicates an “extremely bullish” stance.

Record Number Of Fund Managers Overweight On Emerging Markets, Says BofA Survey

Small Caps

A record 41% of the participants surveyed expect small caps to outperform large-cap peers over the next 12-months.

Record Number Of Fund Managers Overweight On Emerging Markets, Says BofA Survey

Sectoral Picture

Fund managers are positioning themselves for a cyclical recovery in January as they increase allocation to energy, materials, banks, small caps and emerging markets.

The funds have now started to rotate out of the once overweight healthcare sector, along with technology and the U.S., the survey said.

Also, long positions in Bitcoin, the largest digital currency, jumped to the top with 36% of the fund managers saying it is the most “crowded trade”, dethroning “long tech” for first time since Oct. 19, the report said. Long tech (31%) and short U.S. dollar (23%) follow.

Record Number Of Fund Managers Overweight On Emerging Markets, Says BofA Survey

Also read: BofA Clients With $561 Billion Say Bitcoin Is Most Crowded Trade

Other Key Highlights

  • Fund managers have turned overweight on energy for the first time since January 2020.
  • Sector allocation to tech cut to the lowest since December 2018.
  • 87% fund managers expect global profits to improve over the next 12 months — the best outlook on profits since February 2002.
  • 92% of the fund managers expect higher inflation over the next 12 months.
  • Fund managers continue to expect that value stocks will outperform growth — projection for which remained high in January.
  • Healthcare, infrastructure and inequality will be new President Joe Biden’s top priorities in his first 100 days in office.
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