China And India Lose Their Appeal For Investors On Inflation Fears

The world's fund managers are pulling their money out of China and India at a record pace on mounting fears of inflation and are now more pessimistic about global equities than at any time in the past decade, The Telegraph

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The world’s fund managers are pulling their money out of China and India at a record pace on mounting fears of inflation and are now more pessimistic about global equities than at any time in the past decade, The Telegraph reports.

The latest survey of investors by Merrill Lynch shows that Europe has become the most unpopular region, while Britain is still trapped in the doldrums.

But the big surprise is the sudden change in view on the emerging powers of Asia, as overheating and spiralling oil costs spoil the boom.

“World growth is slowing and yet central banks might still have to tighten monetary policy, that is what is scaring people,” says David Bowers, the organiser of the survey. The vast majority of fund managers think earnings forecasts have lost touch with reality.

The exodus from China reached fever pitch this month as investors slashed their net “weighting” position to -58, down from -14 in May. The Shanghai bourse had already fallen by almost half since October.

The fund managers have been slow to sense the danger.

India fell to -63 as investors took fright at the country’s budget and trade deficits. There is concern over a relapse towards Nehru-era policies after Delhi halted trading in a range of commodity futures and restricted rice exports.

The survey of 204 fund managers worldwide suggests that the love affair with emerging markets is going cold.

The net weighting was -63 for Chile, -47 for Taiwan, -37 for Korea and -32 for Poland.

Bowers says investors no longer believe that the bloc has a grip on inflation. They are discriminating between the commodity producers and those that rely on imports of oil, minerals and food.”Saudi Arabia is not the same as Turkey,” he says.

Fund managers are still super-bullish on Russia, betting that the energy boom has life yet. A net 62% are overweight oil and gas shares. The most hated trio are travel and leisure (-66), banks (-62) and property (-60).

Merrill Lynch says fund managers were belatedly adapting to a global inflation shock that poses a serious danger to asset prices, and risks setting off “civil protest” in Argentina, Indonesia, South Africa and the Gulf states.

As the new story unfolds, America is coming back into favour, emerging as a sort of safe haven in a fast-changing world where trusted institutions command a premium. Investors are quietly rotating back into Wall Street – despite a chorus of pessimists. A net 23% are overweight US equities, the highest since August 2001.

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