Since last month’s equity market turmoil was triggered by developments in emerging markets, especially China, most fund buyers in the country are now underweight here. Asian equities are even the least popular equity asset class now. Some 36% of Sweden’s fund buyers are planning to decrease their allocation. Emerging market debt is even less liked: half of Swedish investors have abandoned the asset class completely.
According to a recent poll by Bank of America Merrill Lynch, fund managers now have a global net underweight of 34% to EM equities, and consider a recession in China the biggest tail risk for the global economy.
China bashing
And they are right, admit even emerging market equity fund managers attending Expert Investor Sweden. “There are clearly structural imbalances within China. After huge amounts of capital were injected following the financial crisis, the average return on assets is now 2.8%. This is clearly below their cost-of-capital,” said William Ballard, head of emerging market equities at Aviva Investors.
“Apart from that, Chinese companies have a strong reliance on bank capital and it is difficult to rebalance that to long-term, stable capital,” he added. Ballard finished his gloomy enumeration by pointing a key difference between China and the West when it comes to dealing with that sort of problem. “If you look at the West, these imbalances are rebalanced by a recession. But because a recession increases unemployment as it gets rid of excess capacity, China will prefer a continuing deceleration of economic growth. But it’s very difficult to deliver that without a hick-up.”
