Credit tightening in China tops European disintegration as biggest risk for global fund managers

More than half of survey respondents expect tightening to slow China’s economy, but see it having marginal impact on global growth

PUBLISHED : Wednesday, 17 May, 2017, 6:50pm
UPDATED : Wednesday, 17 May, 2017, 11:22pm

China has topped European disintegration as the biggest risk facing global fund managers for the first time in 16 months, with 31 per cent citing Chinese credit tightening as their main worry, a survey by Bank of America Merrill Lynch found.

Tighter Chinese credit is followed by a crash in global bond markets (19 per cent) and a trade war (16 per cent) as top concerns of fund managers in the survey conducted from May 5-11.

In the previous three months, fund managers had picked European disintegration as the biggest tail risk, while in January last year they identified a mainland Chinese recession as their No 1 concern.

However, only 11 per cent of respondents in the latest survey think Beijing’s tighter monetary policy will cause a meaningful drop in Chinese or global PMI, a benchmark that tracks manufacturing activity, while more than half (56 per cent) expect it will slow Chinese PMI but will have marginal impact on global growth.

“China tops the tail risk list in a comparative way, as globally speaking risks are easing after the French election result,” said Larry Hu, China economist at Macquarie in Hong Kong.

“But I do not think the current policy tightening will lead to any major credit crunch or even financial crisis in China, as policy makers are very skilled at making stress tests. For the deleveraging mission, they are taking two steps forward followed by one step back, to make sure not to trigger any systemic risks,” he added.

Starting last Friday Beijing began softening its tightening stance with the People’s Bank of China injecting 459 billion yuan (US$66.5 billion) of fresh funds into the market via the Medium-Term Lending Facility (MLF) in order to smooth out interbank liquidity volatility.

China’s April factory output and investment slow, as growth dials back

As for global trading markets, the survey found that long Nasdaq positions top the list for the first time, while going long on US dollars falls from top spot after 5 months.

Preference for asset allocation to eurozone equities surged to its highest since the last survey in mid-March. A total of 59 per cent of investors are overweight eurozone equities, up from 48 per cent overweight in April. It is the highest allocation since March 2015, and the highest in the survey’s history.

Allocation to Japanese equities fell modestly to 12 per cent overweight, compared to 15 per cent overweight last month, the survey shows.

Irrationality is not yet visible despite all-time highs in credit and equity markets
Michael Hartnett, BofA Merrill Lynch

“Investor sentiment is bullish,” said Michael Hartnett, chief investment strategist with BofA Merrill Lynch. “But irrationality is not yet visible despite all-time highs in credit and equity markets, robust global [earnings per share] and a benign French election result.”

Ronan Carr, the bank’s European equity strategist, added: “The recent outperformance seems due for a pause, especially versus the US”.

Commenting on the Japanese market, Shusuke Yamada, BofA Merrill Lynch chief Japan FX/equity strategist said: “Although global investors’ allocation to Japanese equities declined for a second month, easing risk factors, better currency levels, and fundamentals hint of a possible summer rally.”

A total of 213 respondents with US$645 billion in assets under management participated in the survey, according to the bank.