The Fund Manager Survey conducted by Bank of America Merrill Lynch (BAML) for the month of July found that the sentiment towards China’s economic situation continues to worsen.

BofAML Fund manager survey

Findings of the Fund Manager Survey

The survey showed that 62% of respondents believe that China’s economy will weaken next year and 56% of fund managers believe that the country is headed towards a hard landing.  Investors had been worried about China’s hard landing in recent months, and even last year.

Despite increasing concern towards China, the survey found that global investors remain confident in overall global economic growth.  Fifty percent (52%) of the respondents think the global economy will become stronger over the next year.

Investors believe that the economy of developed countries, particularly Japan and the United States will grow because of the increasing appetite for equities. BAML noted that a majority of asset allocators are currently overweight on equities at 52%, which is nine points higher than the percentage two months ago.

The survey also indicated that investors’ confidence in the United States is high at 83% favoring the dollar over other currencies, which is the highest level recorded by the survey.

Investors believe that Japan offers the best outlook for corporate profits. All regional fund managers expect to achieve double-digit earnings growth in the country next year.

Confidence in Bonds Dropping

In terms of bonds, the survey revealed that fund managers are becoming increasingly negative. BAML indicated that 55% of fund managers are now underweight in fixed-income instruments and lifted their cash holding to 4.6%. According to the research firm, it is the highest level in a year and demonstrates a contrarian buy signal for equities.

Michael Harnett, chief investment strategist at BAML Global Research, commented, “With the support of a host buy signals in recent weeks, the ‘Great Rotation’ is in full force. Our positive view of equities would be further reinforced if loss of faith in China’s growth story turns out to be overdone.”

In addition, the research firm’s investment strategist in Europe, John Milton, said, “Global investors are trailing the Eurozone’s economic momentum. They should prefer cheap domestic exposures to its rich EM exposures.”

The BAML survey also revealed that 44% of investors perceived that global emerging markets (GEM) offer the worst outlook for corporate earnings in the region. Investors are disappointed by the quality of earnings in China. The research firm noted that GEM valuations have not declined sufficiently enough to reflect the negative perception of investors.