The smart money allocated more money to emerging markets last month as investor sentiment turned against EM stocks, though fund managers are still underweight on them overall, and even though a majority of fund managers think equities are currently overvalued they have increased their long positions. The biggest reductions were in UK and Eurozone allocations, with modest a modest pull away from Japan. Even though some high-profile tech stocks have taken a beating in recent months, fund managers only allocated a small portion of their portfolios away from them.

“Investors have ‘tapered’ their extreme Q1 positions in EM & growth stocks; cash levels remain high; but March/April sell-off has not induced big reductions in tech exposure, equity exposure & hedge fund leverage,” writes Bank of America Merrill Lynch chief investment strategist Michael Hartnett in the April 15 Global Fund Manager Survey. The survey, conducted between April 4 and 10, included 239 respondents with $674 billion AUM.

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Fund managers like value over growth, large cap over small

Fund managers became more bullish on value stocks versus growth stocks, with the net percentage in favor of value nearly tripling bringing it to an eight year high for the survey, and on large caps versus small caps. More fund managers expect the yield curve to flatten as short term interest rates begin to rise, and the rate at which fund managers think the US dollar is undervalued has hit an 8 year high. It’s a sign of their confidence that not only did managers’ profit expectations increase over March, but the biggest demand was for more capex to take advantage of the global recovery, instead of buybacks or improving balance sheets.

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Fund managers say EM is undervalued, but remain underweight

Fund managers are still most overweight on banks and consumer discretionary stocks, and most underweight on EM and energy stocks, even with the increase in those positions. Part of the reason for the EM underweight is fund managers’ pessimism over China – a majority thinks that the Chinese economy will be weaker one year from now. There was a sharp change in the number of managers who think that EM equities are undervalued, especially when compared to US equity prices.

Fund managers are also slightly overweight cash and solidly underweight bonds, which makes sense with the prevailing view that interest rates are going to rise. Even though Federal Reserve chair Janet Yellen has walked back previous statements suggesting that a rate hike is coming early next year, tapering has proceeded on schedule.

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